(Bloomberg) — Bonds are falling around the world as investors mull prospects of slower US interest-rate cuts, a trend that risks upending debt positions everywhere.
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Yields on Australian notes due in a decade jumped as much as 16 basis points, New Zealand’s 10-year yields climbed five basis points, while those in Japan climbed to a two-month high. That followed an 11-basis-point jump in similar-maturity US yields and a 10-basis-point surge in German ones Monday.
At the heart of the global debt selloff is investor soul searching around Federal Reserve rate-cut expectations and whether once again they appear overdone. A robust US economy, firming odds of a Donald Trump election victory and cautious comments from Fed officials on the pace of monetary easing muddies the prospects of gains for bond traders everywhere.
“We will see 4.5% probably early next year” for US 10-year yields, said Ed Yardeni, founder of Yardeni Research, speaking in an interview on Bloomberg Television. Yields rising to 5% would “depend a great deal on the election results — if we do get a sweep by the Democrats or Republicans, it almost doesn’t matter. Either way we are going to have wider deficits,” he said.
Overnight-indexed swaps suggest a 25-basis-point Fed rate cut next month is no longer certain. Apollo Management is among those seeing the central bank potentially keeping rates unchanged at its next meeting, while T. Rowe Price sees US 10-year yields climbing to 5% next year on risks of shallower rate cuts and as growth improves.
US 10-year yields rose a further two basis points to 4.22% in Asia Tuesday. Treasury volatility has climbed to the highest level this year, based on the ICE BofA Move Index that tracks anticipated swings in US yields based on options.
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Repricing on rate paths are also emerging elsewhere.
Swaps are signaling the Reserve Bank of Australia will cut its benchmark rate cut by only about 50 basis points through to the end of August next year, half of what was priced in after the September policy meeting. Similarly, traders brought forward their forecast for the next Bank of Japan rate hike to June, compared with later than July seen last month.
Demand for long-term holdings of Japanese “10-year bonds, which carry relatively high interest-rate risk, is likely to be limited” in this environment, Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, wrote in a research note.
Emerging-market bonds are also falling, with Indonesia’s five-year yield climbing seven basis points.
Not everyone is expecting the selloff to gain momentum. The Fed and Reserve Bank of New Zealand, among others, are in the midst of rate-cutting cycles, which should generate an underlying bid for bonds.
“We probably see a slight correction from here,” said Lucinda Haremza, vice president of fixed-income sales at Mizuho Securities in Singapore. There’s “risk of a stronger rally on rising Middle-East tensions or a Harris election win,” she said.
For now though, issues around US debt supply, election hedging and markets front-running the risks of a Republican “red sweep” at the polls may see larger-than-usual fluctuations in Treasuries.
BlackRock Investment Institute is among those underweight shorter-maturity Treasuries.
“We don’t think the Fed will cut rates as sharply as markets expect,” strategists at the company including Wei Li wrote in a note. An aging workforce, persistent budget deficits and the impact of structural shifts such as geopolitical fragmentation should “keep inflation and policy rates higher over the medium term,” they wrote.
–With assistance from Haslinda Amin.
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