Global bond yields drop as Russia-Ukraine conflict puts the US Fed in a tight spot.
Bond yields across geographies dropped today on expectations that the geopolitical risks stemming from conflict between Russia and Ukraine would prevent the US Federal Reserve from aggressively hiking rates.
Russian forces invaded eastern Ukraine in an escalation of conflict between the two countries, roiling markets across the globe. Russian equity indices plunged while the rouble tumbled.
The yield on 10-year U.S. notes dropped as much as 13 basis points (bps) to 1.86%. Yields on 10-year Australian securities fell as much as 12 bps to 2.15%. The rate on similar-maturity New Zealand debt fell three bps to 2.76%. Singapore 10 year bond yield fell 6 bps to 1.88%. Germany 10 year bond yield lost 7 bps to 0.15%, United Kingdom 10 year bond yield 9bps to 1.39%, France 10 year bond yield 5 bps to 0.68%, Italy 10 year bond yield 4bps to 1.90%, Spain 10 year bond yield 5 bps to 1.21%, Netherlands 10 yr bond yield 6 bps to 0.41%, Portugal 10 year bond yield 6 bps to 1.08%, Greece 10 yr bond yield 2 bps to 2.58%, Switzerland 4 bps to 0.19%, according to Bloomberg database. One basis point is one-hundredth of a percentage point.
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Meanwhile, India's 10 year bond yield was up 2 basis points to 6.77 percent. Bond yields and prices move in opposite directions. Yields have been on a downtrend for the past few sessions but analysts believe that this could be short-lived.
"Russia’s attack on Ukraine spurred a strong demand for safe havens, taking most global yields lower, including the benchmark US 10Y. While this is a risk event at this juncture, if the conflict goes beyond sanctions and more countries are drawn in, the impact on the global recovery and normalisation path would be more tenuous. For now, concerns over generalised price pressures and geopolitics driven jump in energy prices are likely to keep central banks, including the US Fed, on the policy tightening path", said Radhika Rao senior economist at DBS Bank.
To be sure, the Fed is likely to mellow down on its tightening given the impact of geopolitical tensions on global growth. Ergo, earlier expectations that the Fed will hike seven times this year are now being pared down. That said, inflationary pressures continue to persist and the Fed is in a tight spot here.
"Abrupt change in environment from risk on to risk off is the key driver for rally in the global fixed income market. However, the impact of a war like situation could turn out to be inflationary driven by oil price and supply side disruption. For developed economies, where inflation is already above the head, it is difficult to believe they will allow inflation to remain unanchored" said Soumyajit Niyogi, Associate Director, Core Analytical Group India Ratings and Research.
US Labor Department data showed consumer prices surged 7.5% last month on a year-over-year basis, topping economists’ estimates of 7.3% and marking the biggest annual increase in inflation in 40 years.
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"Fed was supposed to hike rates despite the Russia-Ukraine situation getting escalated. Whether the Fed will start with faster rate hikes with 50bps in March, possibility is low, as it will add uncertainty in the market. However, it will ignite inflation forecast & policy stance in the future, depending on development", said Vinod Nair, Head of Research at Geojit Financial Services.
Conflicts beget uncertainty more than anything else. Global markets may have priced in the impact of the Russian-Ukraine conflict somewhat. For now, safe havens such as bonds are back.