The steepest global bond rout of the modern era extended Monday, with Treasuries and Australian notes sliding and the Bank of Japan stepping in to cap the rise in yields there.
Aussie three-year yields jumped as much as 12 basis points to 2.33 per cent, the highest since December 2014, as the nation’s debt caught up with Friday’s tumble in Treasuries. Japan’s 10-year yields rose to 0.245 per cent, spurring the BOJ to announce an unlimited buying operation to keep them below the 0.25 per cent ceiling it has indicated is the top of its allowed range.
Yields on two-year Treasuries climbed six basis points to 2.33 per cent to lead increases across the curve, as traders priced in two full percentage points of interest-rate hikes from the Federal Reserve over the remainder of this year. The gap between 5- and 30-year yields shrank to less than one basis point, the flattest since it last inverted in 2006.
“Momentum for bonds globally is all one way at the moment, as Treasuries slump on Fed-hike expectations,” said Damien McColough, head of fixed-income research at Westpac. “Even as moves look stretched there are few signs of the current trend bottoming out.”
Japan’s 10-year yields fluctuated following an announcement from the country’s central bank that it will purchase an unlimited amount of benchmark bonds at a fixed rate, the second such move in less than two months. The move underscores the central bank’s commitment to keep monetary settings loose, following Governor Haruhiko Kuroda’s earlier remarks that policy will remain unchanged even if inflation jumps.
The yen fell to a fresh six-year low on the news, at one point breaching the 123 per dollar level.
Elsewhere, the allure of China’s bonds relative to Treasuries continued to fade. Three-year US Treasury yields extended a rise above their Chinese counterparts on Monday, having climbed above them for the first time since 2009 last week.
Bloomberg’s Global Aggregate Bond Index has slumped 7 per cent this year, exceeding the record 5 per cent full-year loss the gauge posted in 1999. Investors are dumping bonds on expectations the Fed will lead an aggressive wave of global central bank tightening this year with the impact of Russia’s war in Ukraine expected to drive up inflation from current levels that are already the fastest since the 1980s.
Australia’s bonds are falling in line with Treasuries even though the Reserve Bank of Australia has insisted it remains patient about the need to hike interest rates with inflation in the South Pacific nation less than half the annual pace of the US The market remains extremely skeptical the RBA can go on resisting the global tightening tide, with swaps traders seeing better than 75 per cent odds the first rate increase comes in May.
“The local short end may not steady until risk assets start to react adversely to thoughts of aggressive rate hikes, or the RBA issues cash rate guidance which the market finds credible,” said Andrew Ticehurst, a rates strategist at Nomura Holdings in Sydney.