Global bonds extended their selloff as hawkish central bank expectations intensified in the wake of Jackson Hole, sending yields on two-year Treasuries to a 15-year high.
(Bloomberg) — Global bonds extended their selloff as hawkish central bank expectations intensified in the wake of Jackson Hole, sending yields on two-year Treasuries to a 15-year high.
Swaps markets showed traders boosting the odds of a three-quarter point Federal Reserve rate hike this month to almost 70%, with bets paring on a rate cut next year. Two-year US yields rose as much as two basis points to 3.51% on Thursday, the highest since 2007, while Australian and New Zealand bonds slumped and Japan’s 10-year yield pushed higher.
The strong determination to fight inflation shown at Jackson Hole has gathered momentum with Cleveland Fed President Loretta Mester the latest policy maker to push back against the idea the central bank could soon reverse course. Data showing that euro-zone inflation jumped to a record in August, above expectations, also weighed on sentiment toward global bonds.
Fed’s Mester Backs Rates Above 4% Early Next Year, No 2023 Cuts
“Yields are likely to keep marching higher until the Fed makes it clear it is getting closer to the top of the cycle,” said Prashant Newnaha, a rates strategist at TD Securities in Singapore. “The risks are arguably skewed toward a higher terminal rate for the Fed.”
A Bloomberg gauge of global government securities came closer to falling into a bear market. The index is down almost 20% since its 2021 peak, already the biggest drawdown since its 1990 inception.
The yields on inflation-protected Treasuries also edged higher Thursday, after the securities were pummeled in late trading Wednesday. Month-end-driven trading, falling energy prices and the impact of the hawkish Fed all played a role.
The rise in real yields — seen by many as the true gauge of borrowing costs — has spilled over into the equity market with Asian stocks and US futures coming under pressure Thursday.
(Updates throughout.)
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