There is currently a sell-off sentiment in the government bond markets around the world. Whether it's US Treasuries, German Bunds, British Gilts, Australian or Canadian government securities, everything is being removed from portfolios. If this trend continues, government bonds might appear to be the new subprime bonds, reminiscent of the ones backed by risky mortgages that triggered the US housing crisis in 2007/08, leading to a global banking and financial market crisis.

But why is everything being sold in the bond market now? The market had anticipated that central banks, in their fight against inflation, had reached the peak of interest rate hikes and that the economy might start weakening, possibly leading to rate cuts. However, many investors now fear that interest rates might stay higher for longer than expected, delaying the anticipated bond rally. Consequently, rising bond yields translate into losses, prompting investors to sell their holdings. As a result, yields on these government bonds continue to increase.

However, there's a catch. These rising yields affect the entire economy, including government financing costs, corporate funding, mortgages, car loans, consumer loans, student loans, and so on. The very yield increases that are causing concerns in the bond market become a burden for the economy, potentially making central banks reconsider interest rate hikes.

This means that bond yields will eventually fall again in a weakening economy. The extent of the yield decline depends on the severity of the economic downturn, a scenario that the bond market is currently anticipating. Traders are reducing their positions for now, adopting a wait-and-see approach before re-entering the market at lower price levels. The bond rally is certainly coming – it has just been postponed for now.