The Treasury downturn ignites global sales as interest rate hikes gain focus

(Bloomberg) – The rise of US government bonds to a three-year high triggered a global jump in borrowing costs as traders again focused on intensifying interest rate hikes from major central banks.

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Ten-year US interest rates rose through 2.75% for the first time since March 2019, as investors priced the impact of the Federal Reserve’s austerity plan and accelerating inflation. Traders are betting nine quarter-point Fed rate hikes at the end of the year, which – including last month’s rise of 25 basis points – would be the fastest tightening rate since 1994. Short-term interest rates in the UK hit the highest in more than a decade as money markets increased Bank of England’s interest rate hikes at the end of the year.

Meanwhile, France’s 10-year dividend premium fell over Germany for the first time in three days. Investors looked at past results of the first round of France’s election – which put President Emmanuel Macron and far-right candidate Marine Le Pen in a second round later this month – and turned their attention back to growing expectations of the European Central Bank to end an era of negative interest rates before December.

“Such a profound move from a corner of markets that have such far-reaching effects – from pricing credit to determining ‘risk-free returns’ is one reason for greater risk-shifting that one might suspect,” said Vishnu Varathan, chief executive. of finance and strategy at Mizuho Bank Ltd. “I think the impact of such sustained and strong movements in government bonds will be hard for anyone to avoid.”

Borrowing costs on European debt rose sharply, with money markets pricing two-quarter-point ECB rate hikes in October. They are a few basis points away from betting on a third such increase before December. The German yield curve became steeper, led by 30-year yields, which rose to the highest level since 2018.

“The steeper curve is actually what you would expect from markets that adopt a more bizarre view of the French election,” said Antoine Bouvet, a strategist at ING Bank NV. Still “

Britain’s debt was also caught in a hurry to bet on further tightening of policy ahead of inflation data on Wednesday, sending 10-year interest rates to a six-year high and confirming traders’ bets of five-quarter points BOE rate hikes at each interest rate decision through November . Consumer prices in the UK are expected to jump at the fastest pace in 30 years, according to a median estimate from analysts asked by Bloomberg.

Asia ripples

Asian markets also felt the effects of the fall in the Treasury, which helped send the dollar past 125 yen for the first time since 2015. They also erased the premium that benchmark Chinese bonds held over their US counterparts for more than a decade, narrowed the gap between two securities to at least since June 2010.

“The dollar-yen looks vulnerable to a move towards 130 if US bond yields continue to push higher and the Bank of Japan remains committed to keeping the 10-year yield at 0.25%,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “This would also put more pressure on other Asian currencies.”

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Technical difficulties

The Fed last week added aggressive quantitative easing proposals to its plan for a rapid rise in interest rates to curb rising inflation. It threatens to remove important support for global risk assets, where high-priced technology stocks feel the bulk of the pressure as rising real interest rates threaten valuations. The inflation-adjusted benchmark rate rose as much as eight basis points to minus 0.11% on Monday, not far from a break in positive territory for the first time in two years.

“If today’s inflation and fiscal concerns subside, the huge diversification advantage that government bonds have given equity investors over the past 25 years will usually increase when stocks that sell strongly can be lost,” wrote David Bianco, Chief Investment Officer. Americas, at DWS. “We believe that the next 5% price movement for the S&P 500 is likely to be down due to declining earnings growth, higher inflation and several Fed increases that are likely to push up the price / earnings ratio.”

The key to global markets this week is US consumer price data as the war in Ukraine, now in its seventh week, intensifies price pressures. Economists expect a 8.4% rise in the March index from a year earlier, a new record for four decades.

(Adds European, British bond movements in fourth, fifth, sixth paragraphs)

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