Global Bonds limp into Fed meeting with seven 2022 hikes priced

This week’s rout in debt around the world continues today as investors brace for the Federal Reserve to start raising interest rates. With inflationary pressures building and the war in Ukraine fuelling a rally in commodities, traders are certain the Fed will kick off a tightening cycle on March 16, and then raise rates at all six subsequent meeting this year (Representative Image)

Australian and New Zealand bonds slumped, extending this week’s rout in debt around the world as investors brace for the Federal Reserve to start raising interest rates.

The yield on 10-year Australian notes jumped to 2.54 percent on March 15, exceeding the pandemic peak reached in March 2020 when the country’s debt market went into meltdown. Yields on similar-dated New Zealand bonds touched 3.09 percent, the highest since 2017, while Treasury yields were little changed after advancing for six straight days.

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With inflationary pressures building and the war in Ukraine fuelling a rally in commodities, traders are certain the US Fed will kick off a tightening cycle on March 16, and then raise rates at all six subsequent meeting this year. A fresh round of restrictions to curb COVID-19 outbreaks in China risks exacerbating global supply bottlenecks, adding to consumer price gains.

Investors will be keenly focused on the Fed’s forecasts, particularly where it sees the so-called terminal rate that would mark the likely peak of the hiking cycle. It is currently projected to be at 2.50 percent, which has acted as a de facto cap for yields on 30-year bonds. This maturity, which is the longest for US government debt, came within two basis points of the level on March 14.

“Should the Fed’s new forecasts put the terminal rate at 3 percent, this would clearly add fuel to this bond market selloff and easily see a break above 2.20 percent on 10-year notes,” said Prashant Newnaha, an Asia-Pacific rates strategist at TD Securities. “The market is well priced for the start of the Fed hiking cycle. As such the focus will fall on the Fed’s dot plot.”

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The yield on 10-year Treasuries was 2.14 percent in morning trading in Asia on March 9. Japan’s benchmark yield rose 1.5 basis points to 0.205 percent.

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This month’s bond selloff picked up steam on March 14, with a marked turnaround now in positioning after debt initially rallied in the wake of Russia’s invasion of Ukraine as investors piled into haven assets.

The prospect of monetary tightening drawing closer has tarnished the allure of holding government debt.

The Fed and the Bank of England are both expected to hike rates this week. And the European Central Bank sent government bonds reeling last week after policy makers unexpectedly signalled an accelerated exit from monetary stimulus in response to consumer-price growth.

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Ten-year Treasury yields are around the highest level since mid-2019 while the 10-year US break-even rate — a bond-market gauge of inflation expectations — rose above 3 percent on March 14 for the first time on record in data going back to 1998.

“As the inflation outlook is being dominated by geopolitical factors and, most recently, the lockdown in Shenzhen, it seems likely that the re-pricing higher of inflation has further to go. This may be particularly disruptive for rates markets,” said Peter Chatwell, multi-asset strategist at Mizuho International Plc.

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