The steepest global bond rout of the modern era is extending as investors dump fixed-income assets on concern that aggressive central bank policy tightening will push the global economy into a recession.
Treasuries slid on Monday and a key portion of the U.S. curve inverted for the first time since 2006. The selloff is a reaction to expectations the Federal Reserve will lead a wave of interest-rate hikes as Russia’s war in Ukraine drives inflation -- already at the fastest since the 1980s -- even higher.
That focus on getting price growth back under control spells trouble for the global economy, which is already under pressure from the impact on commodities and trade from sanctions on Russia, as well as lockdowns in China.
Yields on two-year Treasuries surged as much as 14 basis points to 2.41% to lead increases across the curve, as traders priced in two full percentage points of Fed increases over the remainder of this year. Yields on five-year notes rose above those on 30-year bonds, suggesting some investors anticipate an economic downturn and perhaps even a recession.
The focus on central bank tightening isn’t just confined to the U.S. Traders are also betting on faster rate hikes in the euro area as inflation surges. Money markets now price in four quarter-point rate hikes by the European Central Bank by March next year.
“All the central banks doing the same thing at the same time, plus prices going higher inevitably could lead to first a big slowdown in growth, but the potential for a recession is growing,” said Geraldine Sundstrom, a portfolio manager at Pacific Investment Management Co. “What central banks are doing, sadly, can only work with demand destruction, because the supply shock due to the war, due to Covid resurgence in China, cannot be dealt with with rate hikes.”
In Japan, 10-year yields briefly broke through 0.25%, despite the move by the country’s central bank to step into the market. It announced two unlimited buying operations in one day to keep them below that level -- the top of its allowed range.
“Momentum for bonds globally is all one way at the moment, as Treasuries slump on Fed-hike expectations,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “Even as moves look stretched there are few signs of the current trend bottoming out.”