Global Bonds Extend Rout as Seven Fed Hikes Priced In for Year
Treasuries Rout Extends With Fed Hike Looming, Five-Year Tops 2%
(Bloomberg) -- Australian bonds tumbled Tuesday to extend this week’s global rout as investors anticipate the inflationary impacts of the war in Ukraine will spur aggressive monetary tightening across the developed world.
The yield on 10-year Australian notes jumped eight basis points to 2.53%, exceeding the high reached in the March 19 meltdown for the country’s debt market. That came after 10-year U.S. Treasuries and German bonds surged more than 10 basis points overnight and the rate on U.K. gilts climbed to the highest since 2018. Traders are certain the Federal Reserve will kick off a tightening cycle on Wednesday and raise rates at all six subsequent meeting this year.
The selloff picked up steam amid concern a fresh round of restrictions to curb the spread of Covid-19 in China could exacerbate global supply bottlenecks. It marks a sharp turnaround in positioning, with bonds initially rallying in the wake of Russia’s invasion of Ukraine as investors piled into haven assets. But with inflationary pressures building and the prospect of monetary tightening drawing closer the allure of holding government debt is fading.
Government bonds “are losing their diversification benefits, and we see investors demanding greater compensation holding them amid higher inflation and larger debt loads,” the BlackRock Investment Institute’s Alex Brazier and colleagues wrote in a note to clients.
The Fed and the Bank of England are both expected to hike rates this week. The European Central Bank sent government bonds reeling last week after policy makers unexpectedly signaled an accelerated exit from monetary stimulus in response to consumer-price growth.
Ten-year Treasury yields broke a previous February high to reach 2.12%, the most since July 2019. The 10-year U.S. breakeven rate -- a bond-market gauge of inflation expectations -- rose above 3% for the first time on record in data going back to 1998.
“As the inflation outlook is being dominated by geopolitical factors and, most recently, the lockdown in Shenzhen, it seems likely that the repricing higher of inflation has further to go,” said Peter Chatwell, multi-asset strategist at Mizuho International Plc. “This may be particularly disruptive for rates markets.”
Swaps traders have fully priced in a 25-basis-point increase by the Fed this week, and are certain that the central bank will hikes borrowing costs at each of the six subsequent meetings this year.
“Yields are reflecting a surprise higher shift upward in inflation expectations,” said Jim Caron, senior portfolio manager and chief strategist of global fixed income at Morgan Stanley Investment Management. “Many thought inflation would peak in the first quarter and fall. Now, with oil prices, inflation may stay high.”
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