Largest bond markets face unyielding sell-off.
By Alun John and Naomi Rovnick
October 4, 2023 – 6:04 AM PDT
LONDON Oct 4 (Reuters) – An unrelenting selloff in world government bonds drove U.S. 30-year Treasury yields to 5% for the first time since 2007 and German 10-year yields to 3% on Wednesday in moves that could hasten a global slowdown, hurting stocks and corporate bonds.
A growing sense that interest rates in major economies will stay higher for longer to contain inflation, ever resilient U.S. economic data and a sharp unwinding of traders’ positions for a bond rally have hit home.
In the U.S. Treasury market — considered the bedrock of the global financial system — 10-year yields have jumped 20 basis points (bps) to 4.8% this week alone. They are up almost 100 bps this year, having jumped over 200 bps in 2022.
Bond yields move inversely to prices, and asset managers who had held bonds expecting prices to rally are now throwing in the towel.
“Right now there is huge momentum behind the sell off (in Treasuries) because the positioning in the market has been wrong,” said Juan Valenzuela, fixed income portfolio manager at asset manager Artemis.
“A lot of people bought into the idea that because the Federal Reserve was reaching the peak of rate hikes, it was time to buy government bonds.”
Thirty-year U.S. yields on Wednesday touched the 5% psychological level for the first time since the global financial crisis, and, as the rout spread, Germany’s 10-year Bund yield hit 3% , a fresh milestone in a market where yields were negative in early 2022.
Australian and Canadian 10-year bond yields have surged over 20 bps each this week, and British 30-year government bond yields hit a fresh 25-year high above 5% on Wednesday.
In a further sign of investor nervousness, the closely-watched MOVE bond volatility index is at a four-month high.
RIPPLES
Government borrowing costs influence everything from mortgage rates for homeowners to loan rates for companies.
The speed of the bond rout sparked alarm across equity markets and drove the safe-haven dollar to its highest in months against the euro, pound and embattled Japanese yen.
World stocks (.MIWD00000PUS) hit their lowest since April on Wednesday, and the cost of insuring exposure to a basket of European corporate junk bonds hit a five-month high, according to data from S&P Global Market Intelligence.
“We are very cautious on risky assets at this juncture,” said Vikram Aggarwal, sovereign bond fund manager at Jupiter.
He said, on the one hand, riskier assets like equities and corporate credit were vulnerable to an eventual recession caused by central bank rate hikes.
Or, if recessions do not happen and “we get a higher for longer scenario where (interest) rates stay where they are… that’s ultimately pretty negative for risky assets too.”
A fresh surge in borrowing costs is also a headache for central banks, as they weigh up the need to keep rates high to contain inflation against a deteriorating economic outlook.
However, uncertainty about when and in what form that deterioration occurs is driving further complications in bond markets, and contributing to the sharper sell off in longer dated bonds.
The 10-year U.S. term premium, a closely-watched measure of the compensation investors demand to lend money for the longer term, has turned positive for the first time since June 2021 and risen over 70 basis points since the end of August, according to the New York Fed.
“Everybody’s been calling for a recession that just simply refuses to arrive. And then you’ve got the march higher in oil prices, which of course is complicating the picture in terms of the outlook for policy rates,” said Rabobank head of rates strategy Richard McGuire.
“All of that, I think is conspiring to see investors very wary of locking up their money in longer dated government bonds. They’re demanding compensation for that.
Reporting by Dhara Ranasinghe, Naomi Rovnick, Alun John, Yoruk Bahceli Chiara Elisei and Andy Bruce; Writing by Dhara Ranasinghe and Alun John; Editing by Kim Coghill and Toby Chopra
Representative Henry Cuellar speaks out after he was carjacked at gunpoint near his residence just a mile away from the Capitol.
Analysts predict Generation Z will have a massive impact on the 2024 Presidential Election.
The House of Representatives ousts Kevin McCarthy as House Speaker while Judge Engoron hits Trump with a gag order
The Biden White House is putting a stop to senior administration officials traveling internationally for energy engagements that promote carbon-intensive fuels.
Meta is planning to lay off employees on Wednesday in the unit of its metaverse-oriented Reality Labs division focused on creating custom silicon
Sam Bankman-Fried’s fraud trial got under way with jury selection on Tuesday, nearly a year after his now-bankrupt cryptocurrency exchange’s collapse.
The global cryptocurrency market remains badly scarred following the tumultuous collapse of crypto exchange FTX and other big players last year
A California federal judge has ruled people who own Tesla cars must pursue autopilot claims in individual arbitration rather than court.
rnrn
How are asset managers adjusting their strategies in response to the selloff in government bonds
The Unrelenting Selloff in Government Bonds and Its Ripple Effects
LONDON, Oct 4 (Reuters) - The world government bond market has experienced an unrelenting selloff, driving U.S. 30-year Treasury yields to 5% for the first time since 2007 and German 10-year yields to 3%. These significant moves could potentially hasten a global economic slowdown, impacting stocks and corporate bonds.
Several factors have contributed to this selloff. First, there is a growing sense that interest rates in major economies will remain higher for a longer period to contain inflation. Additionally, the U.S. economy continues to show resilience, with robust economic data supporting the notion that interest rates will remain elevated. Lastly, traders have unwound their positions in anticipation of a bond rally, further exacerbating the sell-off.
The U.S. Treasury market, considered the bedrock of the global financial system, has seen its 10-year yields increase by 20 basis points (bps) this week alone, reaching 4.8%. Year-to-date, yields have risen by almost 100 bps, with a staggering jump of over 200 bps in 2022.
Bond yields move inversely to prices, and asset managers who had expected bond prices to rally are now making a shift in their strategies. Juan Valenzuela, a fixed income portfolio manager at asset manager Artemis, explains that there is significant momentum behind the sell-off in Treasuries due to incorrect market positioning. Many investors believed that the Federal Reserve’s rate hikes would be at its peak, prompting them to buy government bonds.
The 5% psychological level has been breached for the first time since the global financial crisis in U.S. 30-year yields, while Germany’s 10-year Bund yield touched 3%, a fresh milestone in a market where yields were negative in early 2022. Furthermore, Australian and Canadian 10-year bond yields have surged by over 20 bps this week, and British 30-year government bond yields hit a fresh 25-year high above 5% on Wednesday.
The volatility in the bond market has sparked alarm across equity markets, leading to a decline in global stocks and causing the safe-haven dollar to strengthen against major currencies such as the euro, the pound, and the yen. The cost of insuring exposure to a basket of European corporate junk bonds has reached a five-month high. These developments
" Conservative News Daily does not always share or support the views and opinions expressed here; they are just those of the writer."
*As an Amazon Associate I earn from qualifying purchases
