Why a rout in government bonds is worrying

investing.com:

By Yoruk Bahceli, Karin Strohecker and Dhara Ranasinghe

LONDON (Reuters) — The world's biggest bond markets are in the throes of another rout as a new era of higher for longer interest rates takes hold.

In the U.S. Treasury market, the bedrock of the global financial system, 10-year bond yields have shot up to 16-year highs. In Germany, they touched their highest since the 2011 euro zone debt crisis. Even in Japan, where official rates are still below 0%, bond yields are back at levels seen in 2013.

Because government borrowing costs influence everything from mortgage rates for homeowners to loan rates for corporates, there's plenty of reason for angst.

Here's a look at why the bond rout matters.

1. Why are global bond yields rising?

Markets are increasingly reckoning with interest rates staying high.

With inflation excluding food and energy prices elevated and the U.S. economy resilient, central banks are pushing back against rate cut bets.

Traders now see the Fed cutting rates to only 4.7% from 5.25%-5.50% currently, up from the 4.3% they anticipated in late August.

That's compounding worries about the fiscal outlook following August's Fitch U.S. rating downgrade citing high deficit levels. Highly-indebted Italy raised its deficit target last week.

Higher deficits mean more bond sales just as central banks offload their vast holdings, so longer-dated yields are rising as investors demand more compensation.

Many investors were also betting bond yields would drop, so are extra sensitive to moves in the opposite direction, analysts say.

2. How far could the selloff go?

U.S. data remains resilient with Monday's upbeat manufacturing survey pushing Treasury yields up again.

That is no surprise, and analysts do not