This week the bond market finally seemed to understand what central bankers have been warning all year: rising interest rates are here to stay.
From the United States to Germany to Japan, yields that were almost unimaginable at the start of 2023 are now within reach. The sell-off was so extreme that it forced bullish investors to capitulate and Wall Street banks to abandon their forecasts.
German 10-year bond yields are near 3%, a level not reached since 2011. U.S. Treasury yields have returned to their pre-global financial crisis average levels, not far from 5%.
The question now is how much higher they can go after breaking through key levels with no real top in sight.While some believe these moves have gone too far, others are calling it a new normal, a return to the world that prevailed before the era of central banks Fast money Trillions of dollars in bond buying distorted markets.
The impact reaches far beyond markets, affecting interest rates on mortgages, student loans and credit cards, as well as the growth of the global economy itself.
At the heart of the sell-off are the world’s longest-dated government securities, which are the most vulnerable to mounting headwinds. Oil prices are rising, U.S. government debt is rising, the U.S. is at risk of another shutdown, and tensions with China are growing. For those skeptical of Jerome Powell and Christine Lagarde’s tough anti-inflation rhetoric in this context, it doesn’t make for pretty reading.
Frederic Dodard, head of asset allocation at State Street Global Advisors, said, “What’s happened over the past few months is basically the market was wrong because they thought inflation was going to be rapid. decline, and the central bank will be very dovish.” “Everything will depend on what happens with inflation in the medium to longer term, but it’s fair to say we’ve moved away from the ultra-low-yield regime.”
Some of the world’s most prominent investors include BlackRock Inc.’s Larry Fink and Pershing Square Capital’s Bill Ackman Both represent current trends may not be completed.
The milestones have come one after another. German 10-year bond yields just posted their biggest monthly gain this year.Japanese government bonds suffered their worst quarterly selloff in 25 years, and U.S. 30-year Treasury yields hit a record high biggest Quarterly growth since 2009.
“My view is that because of this built-in inflation, we’re going to have 10-year rates at least 5% or higher. This structural inflation is different. I don’t think business leaders and politicians have provided an explanation for this. A little bit of foundation,” Fink said, speaking to Bloomberg’s Danny Berger at the Global Dialogue Forum in Berlin.
Few corners of the market were spared from the rout.austrian century bond typical child Long-term bonds issued during a period of low interest rates took another hit, falling to 35 cents against the euro.
Meanwhile, central bankers continue to try to send a clear message to markets.
Fed officials have largely stuck to the mantra of higher interest rates in the long term. In Europe, European Central Bank President Christine Lagarde strongly opposed the idea of an immediate bailout. She told the European Parliament earlier this week that the central bank would keep interest rates at sufficiently restrictive levels for as long as necessary to curb inflation.
Some learned bond bulls, like T. Rowe Price, took action ahead of September’s rout, flip A shift from long bets on U.S. Treasuries to short bets. Big trades in Treasury futures this week are targeting a steeper curve and higher long-term yields.
Sharp central bank rate hikes have so far had the biggest impact on short-term bonds, pushing up yields and causing a severe inversion of the curve. Expectations of a recession and corresponding interest rate cuts have suppressed long-term yields.
But at least in the United States, a recession never materialized, forcing investors to price in monetary easing. The European economy has proven less resilient, but the European Central Bank – whose sole mandate is to maintain price stability – has repeatedly reiterated that it is too early to talk about easing policy with inflation still well above its 2% target. .
The bond moves were exacerbated by rising demands for compensation from investors for holding long-term debt. Societe Generale said that in Europe, the so-called “term premium” could increase 10-year rates by 50 basis points.
“Rebuilding the term premium will only exacerbate the forces of secular steepening,” said Adam Kurpiel, rates strategist at Bank of France. “It looks like the painful trade in higher yields is likely to continue until something goes wrong.”
To be sure, some think the sell-off has gone too far. Take Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, who has been increasing his holdings of Treasuries for much of the year and now senses a The long-awaited turning point.
“I think we’re in a fear phase about the national debt, and that’s not going to last,” he said. “In our view, inflation is stabilizing and growth will slow. We will get there within six months.”
Also worth noting are revised forecasts from Goldman Sachs strategists, who now see the 10-year Treasury rate at year-end at 4.30%.Although this is about 40 basis points higher Lower than their previous goals and lower than current levels.
Nadège Dufossé, global head of multi-asset at Candriam, said current market trends may not change much and she is considering a gradual shift to longer maturities.
“We believe this movement is over, with signs of slowing inflation and economic weakness in Europe,” she said. “We need to live with the overshoot phase in long-term rates and take advantage of it.”
Even as long-term pressures begin to ease, another major test is looming as the Bank of Japan, a laggard among global central banks, moves toward normalizing policy.Although yields have climbed to multi-year highs effort Policymakers block these initiatives.
“We do think Japan is a real issue and there is debate about what impact this will have on global markets,” said Martin Harvey, portfolio manager of the Hartford World Bond Fund. “That’s a potential catalyst for further steepening, and we Monitoring is required.”
As the week comes to a close, a piece of data gives the Federal Reserve some hope that it is getting inflation under control. Its preferred measure of underlying price growth posted its slowest monthly pace since late 2020.
But even as inflation continues to soften in the U.S. and elsewhere, markets are clearly in a new world.
“We could be back to the pre-2008 world,” said Rob Robis, chief global fixed income strategist at BCA Research. “In the period after Lehman Brothers collapsed and before the COVID-19 pandemic, inflation struggled to stay at 2% and growth There has been some volatility and central banks have had to keep interest rates very low for longer.”
— With assistance from Anchalee Worrachate, Ye Xie, James Hirai, Sujata Rao and Dayana Mustak
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