Bond Markets Are ‘Almost Taunting the Fed’ With Global Rate-Cut Bets

(Bloomberg) -- Bond markets around the globe are acting like central-bank rate cuts are only a rubber-stamp away from becoming a reality.

Just look at the size and scope of the recent rally, which has dragged down yields across the curve. For example, the aggregate rate on longer-maturity sovereign debt ended last week at 1.18%, a level last seen two weeks before Donald Trump was elected U.S. president, according to a Bloomberg Barclays index of securities issued by major economies including the U.S., Germany and U.K. That’s despite repeated assurance from Federal Reserve policy makers that they will be “patient” in making their next move.

“It’s almost a new form of bond market vigilante-ism,” Michael Purves, chief global strategist at Weeden & Co., told Bloomberg Television on Tuesday. Markets “seem to be almost taunting the Fed here,” he said.

Fed Chairman Jerome Powell has a chance for rebuttal when he delivers the central bank’s next rate decision on June 19. His peers in Europe and Japan have taken defensive stances lately, as data show inflation is failing to pick up as hoped. In Europe, there’s concern that inflation expectations are becoming unmoored, and Bank of Japan Governor Haruhiko Kuroda has asserted more stimulus is possible if inflation loses momentum.

The moves are underpinned by conviction that another global easing cycle is on its way. The pressure is showing particularly in the U.S., where yields on two- and 10-year Treasuries have sunk more than a percentage point from highs reached in late 2018. The two-year yield slid to 1.77% last week, the lowest since December 2017.

Pricing in futures markets shows expectations for more than 50 basis points of Fed cuts by the end of this year.

Across Europe, countries are rushing to the market to take advantage of the low-yield environment, with Italy and Spain expected to issue bonds via syndication. Yields in the latter touched an all-time low this month. Portugal and Germany both sold benchmark debt at record-low yields in auctions Wednesday, while the U.S. is also due to sell $24 billion of 10-year securities.

Moribund price pressures are at the crux of this year’s unexpected boom trade in global bonds, and especially in the long-dated assets most vulnerable to having their profitability eroded over time. According to a Bloomberg Barclays index, Treasuries maturing in a decade or more have returned 9% in 2019 -- showing some of the vigor seen during the 25% surge in 2014, the last full year the Fed pinned rates near zero.

“The global inflation story has been lower for longer, it’s also been, increasingly, more correlated,” Purves said. “To a certain degree I think the long end of the Treasury curve is saying all that weakness you’re seeing in the rest of the world, that’s part of our story here.”

--With assistance from Liz Capo McCormick and John Ainger.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Anil Varma

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