Fiscal concerns and worries over a prolonged period of elevated interest rates sent government bonds tumbling in the third quarter, and some investors believe more weakness is in store.
US government bond yields ended September with their biggest quarterly rises in a year, disappointing fund managers who were hoping for relief from the historic losses bonds suffered in 2022, when the US Federal Reserve and other central banks raised interest rates to contain surging inflation.
While bond yields – which move inversely to prices – appeared to be topping out earlier this year, renewed hawkishness from central banks has sent them soaring again in recent weeks.
In the US for example, benchmark 10-year Treasury yields are now hovering around 16-year highs at 4.57 percent , with some investors saying they could rise to 5 percent – a level not seen since 2007. Treasuries are on track to post their third straight annual loss, an event without precedence in US history, according to Bank of America Global Research.
The jump in yields is hurting equities, which notched their first quarterly drop this year in the US and Europe. With US Treasury yields leading the rise, global currencies are reeling as the US dollar rallies.
“The bias is finally being absorbed by the marketplace that rates will remain higher for longer,” said Greg Peters, co-chief investment officer at PGIM Fixed Income.
Monetary policy expectations have been a key driver: the Fed last week surprised investors with their hawkish projections for rates, which show borrowing costs remaining around current levels throughout most of 2024.
Investors have had to readjust swiftly, with traders now betting the Fed’s policy rate, currently at 5.25 percent -5.50 percent , will be down to 4.6 percent by the end of 2024, much higher than the 4.3 percent they foresaw at the end of August.
Similarly, investors have pushed back expectations of European Central Bank rate cuts as policymakers have stuck to their message to keep rates high for longer. Money markets pricing suggests traders see the ECB’s deposit rate is seen at around 3.4 percent by the end of 2024, up from around 3.25 percent at end-August.
The jump in oil prices which are nearing $100 a barrel and up 27 percent this quarter, is another key risk that could keep upward pressure on inflation, and therefore bond yields.
Hawkish central banks have dulled the allure of longer-dated bonds, which with yield curves inverted, are still offering lower yields to investors than shorter-dated ones, said Kit Juckes, global head of currency strategy at Societe Generale, adding that high funding needs in the US were pressuring bond markets.
“It just looks as if finding enough buyers for … all the Treasuries is requiring a price discovery process that is painful,” he said. – Reuters
