Global bonds continued to tumble, as a string of policymakers told investors they should expect further rate hikes, pushing back on speculation central banks were nearing an end to their tightening cycles.
(Bloomberg) — Global bonds continued to tumble, as a string of policymakers told investors they should expect further rate hikes, pushing back on speculation central banks were nearing an end to their tightening cycles.
US Treasuries extended their selloff from Friday as traders ramped up their bets on future tightening, fully pricing in the upper bound of the Fed Funds target rate reaching 5.25% for the first time since November. The Fed’s policy ceiling currently sits at 4.75%, and swaps that reference the four meetings from May to September were all trading above 5%, with a roughly quarter-point drop being factored in for December.
The shift higher in rate expectations continued to drive selling pressure in the front end of the Treasury market, with the two-year rising 19 basis points to 4.48%, and up from a low of 4.03% last week. The five-year yield rose 17 basis points to 3.83%, having traded below 3.5% last week.
Front-end yields traded at fresh session highs late in New York after Atlanta Fed President Raphael Bostic said January’s strong jobs report raises the possibility that the central bank will need to increase interest rates to a higher peak than policymakers had previously expected. Bostic reiterated that his base case remains for rates to reach 5.1%, in line with the median of policymakers’ December forecasts, and stay there throughout 2024.
His comments came after European bonds had already closed lower and the debt market weakness extended to Australia and New Zealand on their Tuesday morning.
“We’re short the front end and we are now having conversations about how much further the selling runs,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments. With the market pricing in a peak policy Fed rate around the central bank’s target of 5.125% for this year, further weakness in front-end Treasury yields likely finds buyers, he added.
Bond investors will focus on Fed officials speaking this week, led by chair Jerome Powell on Tuesday, and also bidding for new debt sales for three, 10-, and 30-year Treasuries.
It’s now looking much less likely that the Fed will cut rates this year, said David Chao, a global market strategist at Invesco. Traders are still pricing over 30 basis points of rate cuts by year-end, according to swaps tied to central bank meeting dates.
“Clearly, the US economy is still running strong and concerns that the economy will slide into recession in the near term were overblown,” Chao said.
German and Italian notes erased all the gains they made after last week’s European Central Bank and Fed policy decisions, when the market latched onto what appeared to be a dovish tilt. Since then, officials including ECB Governing Council member Robert Holzmann — who said the bank would “show its teeth” to bring down inflation — have been busy walking that messaging back.
The “dovish nuggets” in comments from the Fed and ECB last week were more sparse than what the immediate market reaction would suggest, said Gilles Moec, AXA Group chief economist and head of AXA Investment Managers Research. “We would not bet on the patience of policy makers.”
Last week’s rally was further spurred by signs inflation is finally slowing in the bloc, with headline consumer prices falling more than expected. Still, a separate core metric that strips out energy and food held at an all-time high last month, and a blockbuster US jobs report on Friday served as a reminder that central banks are far from done applying the brakes.
The 10-year German yield rose as much as 11 basis points to 2.30% on Monday, above where it was trading just before the ECB announced its decision. The bank raised rates by half a point to 2.5% and signaled another 50 basis-point hike is coming in March.
Wagers on the ECB’s peak rate rose to 3.50%, implying another cumulative 50-basis-point hike beyond what is fully priced. Pricing had dipped to as low as 3.30% last week.
‘Far From Over’
Holzmann was the latest in a succession of ECB officials to stress the importance of further tightening. Governing Council member Bostjan Vasle said hikes are “far from over”, while Gediminas Simkus said that next month’s planned half-point increase in interest rates may not be the last.
UK bonds across the curve were swept up in Monday’s selloff. Bank of England policy maker Catherine Mann said the central bank is more likely to lift interest rates at its next meeting than pause the hiking cycle because of the scale of the upside risks that remain for inflation.
Yields on two- to 10-year gilts rocketed around 20 basis points as traders lifted wagers on the peak to 4.39%, putting the 10-year yield on track for its biggest jump since October. The BOE last week hiked the key rate by a half point to 4%, the highest since 2008.
On Tuesday morning in Asia Pacific, benchmark 10-year Australian yields were up eight basis points, while their New Zealand equivalents rose 17 basis points. Traders there were readying for a rate decision from the Reserve Bank of Australia.
–With assistance from James Hirai.
(Updates with Asia Pacific bond moves on Tuesday morning.)
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