(Bloomberg) — Bonds from Australia to Japan are falling as investors mull prospects of slower US interest-rate cuts, a trend that risks upending debt positions everywhere.
Most Read from Bloomberg
Yields on Australian notes due in a decade jumped as much as 10 basis points, echoing Monday’s selloff in Treasuries. New Zealand’s 10-year yields climbed as much as seven basis points, while those in Japan rose two basis points to 0.975% — near a two-month high.
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.
“Even in those markets where sentiment is extremely dovish, we are seeing yields sell off,” said Prashant Newnaha, senior rates strategist at TD Securities in Singapore, referring to New Zealand’s bonds as an example. There’s a possibility the Fed may be on hold for six months next year, which isn’t something that the markets have really priced in, 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 others such as T. Rowe Price see US 10-year yields climbing to 5% next year on risks of shallower rate cuts and as growth improves.
What Bloomberg Strategists say…
“Treasuries may struggle in the coming months, with a strong upward bias for yields as the US economy stays resilient and supply concerns grow”
Garfield Reynolds, Markets Live strategist
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.
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 keep weighing on bonds.
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 ageing 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.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.