U.S. Treasuries tumbled as the prospect of aggressive interest-rate hikes to cool inflation rippled through markets spooked by rising energy costs.
The decline was led by two-year notes -- the most sensitive to changes in monetary policy -- with the yield jumping toward its highest since 2019. Money markets rushed to place wagers on a faster pace of Fed tightening and raised the odds of an unusually large half-point increase in March to almost 40%, from as low as 13% on Monday.
The repricing comes as Federal Reserve Governor Michelle Bowman suggested a hike of that magnitude could be on the table if inflation readings come in too high. Fears that escalating tensions between Russia and the West could disrupt global energy supplies drove the cost of Brent crude to just shy of $100 a barrel this week, a level last seen in 2014.
The darkening outlook is feeding through to other regions too. After trimming back their wagers for hikes earlier this week, money markets came within a whisker of pricing two quarter-point increases from the European Central Bank by year-end on Wednesday, a view expressed by Governing Council member Robert Holzmann in an interview with Swiss newspaper NZZ.
Global bond markets have been whiplashed as the crisis over Ukraine initially drove investors into havens such as government debt, halting a brutal selloff this year after major central banks took an unexpectedly hawkish tilt. But the tide is turning once again to inflation that threatens to leave policy makers dangerously behind the curve in removing pandemic-era stimulus.
“Higher oil ultimately means greater tightening pressure for central banks, and hence more pressure toward higher yields,” Peter Chatwell, head of multi-asset strategy at Mizuho International Plc wrote in a note. “Rates products are not a trustworthy safe haven in an inflationary environment.”
The market expects the Fed to deliver just under six quarter-point hikes as soon as November, the most aggressive pricing in over a week. The yield on two-year Treasury bonds rose as much as 8.5 basis points, touching 1.63%. The 10-year yield rose four basis point to 1.98%, honing in on the key psychological threshold of 2%.
Earlier in the day, New Zealand’s bond yields spiked after the Reserve Bank raised its official cash rate a quarter of a percentage point to 1% and said it’s likely to lift the benchmark to 2.5% by early next year. Australian 10-year yields headed for the highest close in three years as traders retained bets for a June rate hike.
“The RBNZ communication today was very hawkish, in our view, and shines a light on the RBA,” said Andrew Ticehurst, a rates strategist at Nomura Inc. in Sydney. “The RBNZ said the decision to raise the cash rate by 25 basis points, rather than 50 basis points was quite lineball, indicating larger than usual moves in the future are possible.”
-With assistance from Neha D'silva and Kartik Goyal.