World’s largest fixed income markets hit by relentless selling

The relentless decline in global public debt pushed the yield on 30-year US Treasury bonds to 5% on Wednesday for the first time since 2007, and that of 10-year German debt to 3%, moves that could curb the global economy and hurt the value of stocks and corporate bonds.

The growing sense that interest rates in major economies will remain high for longer to contain inflation, increasingly strong US economic data and the sharp liquidation of positions that traders had taken betting on a rebound in the fixed income have made a dent.

In the US Treasury bond market, considered the pillar of the global financial system, 10-year yields have soared almost 30 basis points (bps) to 4.8% this week, and have risen almost 100 bps this year, after have jumped more than 200 bp in 2022.

Bond yields move inversely to prices, and asset managers who had held bonds waiting for prices to rise are now throwing in the towel.

“Right now there is a lot of momentum behind the selling (of Treasury bonds) because the position the market took was wrong.”said Juan Valenzuela, fixed income portfolio manager at asset manager Artemis.

“Many people bought into the idea that, as the Federal Reserve was nearing the end of its rate hikes, it was time to buy government debt.”.

On Wednesday, US 30-year bond yields touched the psychological level of 5% for the first time since the global financial crisis and, as the decline extended, the German 10-year bond yield hit 3%. a new milestone in a market where returns were negative at the beginning of 2022.

Australian and Canadian 10-year bond yields have risen more than 20 basis points each this week, and 30-year British government bond yields hit a new 25-year high above 5% on Wednesday.

Another sign of investor nervousness is that the market’s closely watched MOVE bond volatility index is at its highest level in four months.

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The cost of public borrowing influences everything from mortgage rates for homeowners to loan rates for businesses.

The speed of the bond decline sparked alarm in equity markets and sent the dollar, a haven for investment, to its highest level in months against the euro, sterling and the beleaguered Japanese yen.

Global stocks hit their lowest since April on Wednesday, and the cost of insuring exposure to a basket of European companies’ junk bonds hit its highest level in five months, according to data from S&P Global Market Intelligence.

Vikram Aggarwal, sovereign bond fund manager at Jupiter, said: “We are very cautious about risk assets at this juncture.”

On the one hand, he added, higher risk assets, such as equities and corporate credit, are vulnerable to an eventual recession caused by central bank rate increases.

And, if there are no recessions, “we find ourselves with a scenario of higher (rates) for longer in which they stay where they are (…) that is also ultimately quite negative for risk assets”.

A further rise in borrowing costs is also a headache for central banks, which are weighing the need to keep rates high to contain inflation and a deteriorating economic outlook.

However, uncertainty over when and how that deterioration will occur is further complicating fixed income markets and contributing to increased selling of longer-term bonds.

The US 10-year term premium, a closely watched measure of the compensation investors demand for lending money longer term, is positive for the first time since June 2021 and has risen more than 70 basis points since late August, according to the New York Fed.

“Everyone has been calling for a recession that simply refuses to come. And then we have the upward march in oil prices, which of course is complicating the picture in terms of the outlook for official interest rates.” said Rabobank head of rates strategy Richard McGuire.

“I think all of this is conspiring to make investors very cautious about locking up their money in longer-term government bonds. They demand compensation for it”.