Daily Management Review

World's Largest Bond Markets Have Been Affected


World's Largest Bond Markets Have Been Affected
On Wednesday, a relentless selloff in global government bonds pushed German 10-year yields to 3% and U.S. 30-year Treasury yields to 5% for the first time since 2007, actions that might hasten a global slowdown and harm stocks and corporate bonds.
Ever-resilient U.S. economic statistics, a strong unwinding of speculators' positions in preparation for a bond rally, and a rising perception that interest rates in major nations would remain higher for longer to limit inflation have all hammered home.
The 10-year yield on the U.S. Treasury market, which is regarded as the foundation of the international financial system, has increased by 20 basis points (bps) to 4.8% just this week. After increasing by more than 200 bps in 2022, they are up by almost 100 bps this year.
Since bond yields and prices move in the opposite direction, asset managers who had kept bonds in anticipation of a price increase are now giving up.
"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."
For the first time since the global financial crisis, 30-year U.S. yields reached 5% on Wednesday. As the crisis spread, Germany's 10-year Bund yield exceeded 3%, a new record in a country where yields were negative in early 2022.
British 30-year government bond yields set a new 25-year high above 5% on Wednesday, while Australian and Canadian 10-year bond yields have increased by nearly 20 bps apiece this week.
The carefully followed MOVE bond volatility index is at a four-month high, which is another indication of market apprehension.
Everything, including mortgage rates for individuals and business loan rates, is influenced by the cost of government borrowing.
Concern at the speed of the bond sell-off spread to the equities markets, pushing the safe-haven dollar to its highest level in months against the troubled Japanese yen, the euro, and the pound.
According to statistics from S&P Global Market Intelligence, world stocks fell to their lowest level since April on Wednesday, and the cost of insuring exposure to a basket of European corporate trash bonds rose to a five-month high.
"We are very cautious on risky assets at this juncture," said Vikram Aggarwal, sovereign bond fund manager at Jupiter.
On the one hand, he claimed, riskier investments like stocks and corporate debt were susceptible to a future recession brought on by central bank interest rate increases.
It's also eventually very detrimental for risky assets if recessions do not occur and "we get a higher for longer scenario where (interest) rates stay where they are."
A further spike in borrowing prices is particularly problematic for central banks, which must balance the need to maintain high rates with a dimming outlook for the economy.
But uncertainty about when and how that deterioration would manifest itself is complicating bond markets and fueling a stronger sell-off of longer-dated bonds.
According to the New York Fed, the 10-year U.S. term premium has increased by roughly 70 basis points since the end of August and has gone positive for the first time since June 2021, a frequently monitored indicator of the compensation investors seek to lend money for a longer period of time.
"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.