Global yields for government bonds extended their climb to the highest levels since 2008 as resilient economic data dashed investor optimism that central banks will soon halt or start reversing interest-rate hikes.
(Bloomberg) — Global yields for government bonds extended their climb to the highest levels since 2008 as resilient economic data dashed investor optimism that central banks will soon halt or start reversing interest-rate hikes.
The yield on a Bloomberg index for total returns on global sovereign bonds rose to 3.3% Wednesday, the highest since August 2008. Government debt worldwide has handed investors a loss of 1.2% this year, making the asset class the worst performer across Bloomberg’s key bond indexes.
The US 10-year yield rose six basis points to 4.31% on Thursday, taking it to around three basis points away from last October’s peak, which was the highest since 2007. Australian 10-year yields jumped as much as 10 basis points to the highest since 2014 even after data showing the economy unexpectedly trimmed jobs in July. Similar-maturity New Zealand yields climbed 10 basis points to exceed 5% for the first time since 2011.
“Recent data has been firmer, fueling expectations that central banks have a little more work to do,” said Prashant Newnaha, a macro strategist at TD Securities Inc. in Singapore. “The current selloff is being led by the longer end, underscoring concerns about supply and liquidity.”
Treasuries have been a key driver of the global debt selloff as resilience of the world’s largest economy defies expectations that more than five percentage points of Federal Reserve interest-rate hikes would push it toward recession. The securities have also been hit by expectations the US government will issue more bond over the coming quarter to plug widening federal deficits.
Benchmark US 10-year yields have jumped more than 30 basis points in August, set for the biggest monthly increase since February. Moreover, Japan — which has the developed world’s lowest rates thanks to ultra-easy monetary policy — saw weak investor interest when selling 20-year notes Thursday. By one measure, demand was the weakest since 1987.
Yield Hunt
The higher yields in the US continue to draw in buyers. Investors pumped $127 billion this year into funds that invest in Treasuries, on pace for a record year, Bank of America Corp. said last week, citing data from EPFR Global. Asset managers boosted their overall long positions in Treasury futures to a fresh record in the week to Aug. 8, according to Commodity Futures Trading Commission data. JPMorgan Chase & Co.’s client survey showed long positions in the week to Aug. 14 matched the peak set in 2019, which was the highest since 2010.
Global bonds in particular are looking attractive given that yields worldwide are being lifted by the US at a time when numerous economies are showing weakness, said Steven Major, global head of fixed-income research at HSBC Plc.
“Much of the bear case for bonds is cyclical and local to the US,” he wrote in a note dated Wednesday. “It therefore misses the global backdrop, along with longer-run structural drivers. The fact that some emerging-market central banks are already easing tells us that inflation is falling fast or that they have cyclical and structural headwinds.”
Global bonds are positioned to outperform within six to 12 months because central banks are getting close to the end of their rate-hike cycles, Western Asset Management said this week.
However, investors are likely to watch upcoming data as well as debt supply dynamics for further clues. The latest spur for Treasury yields came Wednesday when the US reported stronger-than-expected housing and industrial-production data, while minutes from the Fed’s July meeting showed another hike remains on the table for this year.
The Treasury is likely to boost auction sizes in November and February, according to Michael Cudzil, portfolio manager at Pacific Investment Management Co. That could pressure yields higher again unless inflation comes back down, he said.
–With assistance from Liz Capo McCormick.
(Adds JGB auction in sixth paragraph, updates yields.)
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