Goldman, Nordea Warn That Global Rout in Bonds Has Room to Run
(Bloomberg) -- After a whirlwind week that caught central bankers off guard, Wall Street is getting some relief as the ferocious bond selloff eases. But the fear is that the market rout still has room to run.
U.S. 10-year Treasuries rose for the first time in three days, yet were still set for their worst week since the dark days of the pandemic in March. Bonds in Europe rallied after the European Central Bank’s Isabel Schnabel said that the monetary authority may lend fresh support if the surge in yields saddles economic growth.
Concern the U.S. economy is poised to overheat is spurring money managers to pare their exposures en masse, while strategists from Goldman Sachs Group Inc. to Nordea Investment Funds SA warn the selloff may not be over.
“We would expect a tactical pause here as central banks push back -- structurally though, the direction is higher and we continue to be short,” said Alberto Gallo, a money manager at Algebris Investments in London, who is positioned for an intensifying rout in the U.S., the U.K. and Australia. “Bond yields are still well below where they should be versus inflation and growth.”
U.S. 10-year bond yields fell four basis points to 1.47% in Friday, taking the rise this week to 15 basis points. The yield on German peers dropped one basis point to minus 0.24%. The Reserve Bank of Australia was in the market with more than $2 billion of unscheduled purchases.
There are plenty of technical reasons for the startlingly speed of the bond rout. But the roaring reflation trade and oncoming U.S. stimulus are giving bond bears ammo, even after Federal Reserve Chairman Jerome Powell spent two days this week issuing especially dovish pronouncements. Treasury traders all-but ignored him, sending five-year bond yields jumping by the most since March.
“This is turning into an inflation tantrum,” wrote Padhraic Garvey, head of Americas research at ING Groep NV in a note to clients Friday. “Official policy is exceptionally easy, and Fed Chair Jerome Powell decided not to take the opportunity to calm things this week.”
Among the biggest-hit bond markets this week is the U.K., where surging yields paved way for money-market traders to completely price out interest-rate cuts.
Goldman Sachs says U.S. breakevens -- a market gauge of inflation expectations -- are likely to overshoot their fair value as part of the “recovery trade.” HSBC Holdings Plc’s famed bond bull meanwhile has even been forced to eat “humble pie,” raising the bank’s year-end 10-year Treasury yield forecast by 25 basis points to 100 basis points.
Scars are being left across debt markets. More than $1 trillion of negative-yielding bonds has been wiped out, according to Bloomberg Barclays Indexes. Gauges of implied volatility both sides of the Atlantic have climbed to multi-month highs, signaling the pain may not yet be over.
For Nordea Investment Funds SA’s senior macro strategist Sebastien Galy, traders are likely to continue to test the resolve of central bankers as he warns of another “taper tantrum” this year.
“There is a perception that central banks can suppress everything by absorbing the flow, the reality is that they encourage others to follow them,” he wrote in an email to clients. “While rates can be compressed a good 20 basis points by intervening, the market will over time test the Federal Reserve.”
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