Global bond rout extends as three half-point Fed hikes priced in

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Global bonds added to this year’s epic rout as traders brace for the Federal Reserve to raise interest rates at the most aggressive pace since 1982.

The policy-sensitive two-year yield climbed as much as six basis points on Friday to 2.74%, the highest since late 2018, after Fed Chair Jerome Powell said “it is appropriate in my view to be moving a little more quickly.” That shrank the premium 10-year notes offer over two-year securities, sending the yield gap below 20 basis points.

“I think there’s something in the idea of front-end loading,” Powell said during an International Monetary Fund panel discussion, adding that a half-percentage point hike in May “is on the table.”

Australian and New Zealand bonds also slid, as the bearish tone in debt markets was reinforced by heightened expectations for interest-rate increases by the European Central Bank, which sent euro-area debt tumbling. Australian 10-year yields rose seven basis points to 3.15%, while similar-dated New Zealand notes traded five basis points higher at 3.56%.

“Fifty-basis-point hikes in May and June are reasonable, while 50 in July will depend on the how the data plays out in the next few months,” Ben Jeffery, rates strategist at BMO Capital Markets, said of the outlook for the Fed.

Such a set of hikes would represent the sharpest tightening since January 1982, when the Fed raised its benchmark by 3 percentage points in one go. The last half-point increase was in May 2000. In subsequent cycles, the U.S. central bank raised rates exclusively in quarter-point steps that were clearly telegraphed to the bond market.

With headline and core inflation running at the fastest annual rates since the early 1980s, Powell and other Fed officials have signaled they’re prepared to raise rates in half-point increments if necessary, after the quarter-point hike in March. St. Louis Fed President James Bullard even flagged the potential the central bank might have to consider a 0.75 point increase.

All told, the U.S. rates market now expects 2.42 percentage points of additional rate hikes by the Fed’s December meeting, a rise of about 30 basis points since the close on Monday. The benchmark rate is currently in a range of 0.25-0.50%.