(Bloomberg Opinion) — Bond markets tumbled Monday as investors anticipated that inflationary shocks from the war in Ukraine would prompt a sharp monetary tightening across the developed world.
Yields on 10-year US Treasuries and German bunds rose as much as 13 basis points, and the rate on UK gilts advanced to the highest level since 2018. Five-year Treasury yields topped 2 % for the first time since May 2019, as traders braced for the Federal Reserve to kick off a tightening cycle on Wednesday.
The sell-off accelerated amid concerns that a new round of restrictions to curb the spread of Covid-19 in China could exacerbate global supply bottlenecks. It marks a sharp change in positioning as bonds initially rose in the wake of Russia’s invasion of Ukraine as investors piled into safe-haven assets. But with rising inflationary pressures and the prospect of monetary tightening ever closer, the appeal of holding public debt is fading.
Government bonds “are losing their diversification benefits, and we see investors demanding higher compensation for holding them amid higher inflation and higher debt loads,” Alex Brazier of the BlackRock Investment Institute and colleagues wrote in a note to investors. customers.
The Fed and the Bank of England are expected to raise rates this week. Last week, the European Central Bank sent government bonds reeling after policymakers unexpectedly signaled an accelerated end to monetary stimulus in response to rising consumer prices.
Ten-year Treasury yields surpassed a previous high recorded in February and reached 2.12%, the highest level since July 2019. The US 10-year breakeven rate, a gauge of expected inflation in the bond market, rose above 3% for the first time, in data going back to 1998.
“As the outlook for inflation is dominated by geopolitical factors and, more recently, by the lockdowns in Shenzhen, inflation-driven upside appreciation seems likely to go further,” said Peter Chatwell, multi-asset strategist at Mizuho International Plc. “It should be particularly disruptive for rate markets.”
Swap traders are fully pricing in a 25 basis point hike from the Fed this week, and are almost certain the central bank will exclude borrowing costs at each of the subsequent six meetings this year.
“Yields are reflecting a surprise upturn in inflation expectations,” by Jim Caron, senior portfolio manager and chief global fixed income strategist at Morgan Stanley Investment Management. “Many thought that inflation would peak in the first quarter and fall. Now, with oil prices, inflation can stay high.”
Global bonds extend defeat on inflation fears ahead of imminent Fed hike
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