Falling Treasuries spark global selloff as rate hikes gain focus

(Bloomberg) – Long-term U.S. Treasury yields hit a three-year high, fueling a global rise in borrowing costs as traders stepped up bets on aggressive rate hikes from major central banks.

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US ten-year yields climbed 2.75% for the first time since March 2019 as investors priced in the impact of the Federal Reserve’s tightening plan and accelerating inflation. Traders are betting the Fed will enact about nine more quarter-point rate hikes by the end of the year, which would be the fastest policy tightening since 1994.

Long-term debt was weighed down ahead of US Treasury Department sales over the next two days of 10- and 30-year debt, with yields typically rising ahead of auctions to entice buyers. Treasuries also came under pressure on Monday after Amazon.com Inc. launched a 7-part debt offering.

UK short-term rates hit their highest level in more than a decade as money markets stepped up bets on Bank of England rate hikes by the end of the year. German yields hit their highest level in almost seven years.

Meanwhile, France’s 10-year yield premium over Germany fell for the first time in three days. Investors watched the results of the first round of the French election – which put President Emmanuel Macron and far-right candidate Marine Le Pen in a runoff later this month – and turned their attention back to rising expectations to the European Central Bank. end an era of negative rates by December.

“Such a deep move from one corner of the markets that has such pervasive effects – from pricing credit to determining ‘risk-free returns’ is cause for major risk reassessment, one would suspect,” said said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd.

Borrowing costs on European debt surged, with money markets pricing in two quarter-point ECB rate hikes by October. The yield on German 10-year bonds jumped 11 basis points to 0.82%, the highest since September 2015. Money markets expect ECB rate hikes of two quarter points by October, and they are two basis points away from betting on a third such raise by December. The German yield curve steepened, driven by 30-year rates, which reached their highest level since 2018.

Read more: German yields climb to highest since 2015 amid ECB Hawkish bets

Britain’s debt was also caught in a rush to bet on further policy tightening ahead of inflation data on Wednesday, sending 10-year yields to a six-year high and confirming traders’ bets on price hikes. BOE rates five quarter points in every rate decision through November. Consumer prices in Britain are set to jump at the fastest pace in 30 years, according to a median estimate from analysts polled by Bloomberg.

“What’s troublesome is the strength behind the selloff” in US Treasuries, said Ben Emons, global macro strategist at Medley Global Advisors LLC. Part of the rise in the sharp rise in yields, he said, is likely related to the fact that mortgage rates also rose and reduced the amount of refinanced mortgages, triggering the sale of Treasuries linked to the cover.

US mortgage rates hit their highest level since December 2018, with a 30-year average at 4.72%, according to Freddie Mac.

Asian Ripples

Asian markets also felt the impact of declines in Treasuries, which helped push the dollar past 125 yen for the first time since 2015. They also erased the premium that benchmark Chinese bonds held. against their American counterparts for more than a decade, narrowing the gap between the two titles at least since June 2010.

“The dollar-yen looks vulnerable to a move towards 130 if US bond yields continue to climb and the Bank of Japan remains committed to keeping the 10-year yield at 0.25%,” said Khoon Goh, head of research. in Asia at Australia & New Zealand Banking Group Ltd. in Singapore. “It would also put more pressure on other Asian currencies.”

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Last week, the Fed added aggressive quantitative-tightening proposals to its plan for rapidly raising interest rates to limit soaring inflation. This threatens to remove key support for global risk assets, with high-priced tech stocks coming under pressure as rising real yields threaten valuations. The inflation-adjusted benchmark yield climbed as much as eight basis points to minus 0.11% on Monday, not far from breaking into positive territory for the first time in two years.

“If today’s inflation and fiscal concerns worsen, the great diversification benefit that Treasuries have provided to equity investors over the past 25 years by generally rallying when equities are heavily sold could be lost,” wrote David Bianco, chief investment officer, Americas, at DWS. . “We believe the next 5% price move for the S&P 500 will likely be down given slowing earnings growth, elevated inflation and numerous Fed hikes that will likely put pressure on the ratio. prices/benefits.”

The 20-year bond’s yield climbed as much as nine basis points to 3.0011%, the highest on record for the benchmark in two decades since the Treasury resumed issuing at that duration in May 2020.

Read more: Treasury bill yielded 3% for the first time in three years

U.S. consumer price data is critical for global markets this week as the war in Ukraine, now in its seventh week, amplifies price pressures. Economists expect the March index to gain 8.4% from a year earlier, a new high in four decades. For now, strategists see the momentum of higher yields persisting.

“At this rate, markets are targeting another nice round number like 3%” on the 10-year Treasury yield, George Goncalves, head of US macro strategy at MUFG Securities Americas, said in a note. “Given the nature of the multi-decade bull run in bonds, we never had a full retracement from a prior high as yields had consistently fallen.”

(Adds 20-year bond yield pricing to fifteenth paragraph)

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