Bonds everywhere suffer as rising rates fear swamp traders

(Bloomberg) – Global bonds are tumbling after two interest rate hikes this week, which made traders realize that central banks are far from done fighting inflation.

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Yields on shorter-dated Treasuries are near their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back to ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with further rate hikes to combat stubbornly rapid gains in consumer prices.

The tightening is convincing traders to rethink their bets on Federal Reserve rate cuts later this year, underscoring the threat that the battle against inflation may be far from over.

Further concerns over a protracted rate hike cycle could set the stage for another spike in volatility in global risk assets. But just as during last year’s rises, concerns have also put traditional safe havens in the crosshairs – a gauge of US Treasuries fell more than 1% in May as funds repositioned.

The latest developments ‘go against the mainstream narrative that central banks are poised to pause rate hikes, especially as Canada was one of the first to formally signal a pause in January’ , wrote Deutsche Bank AG strategists, including Jim Reid. note. “The big question now is whether the Fed might follow up with a hike on its side next Wednesday, or whether it will ultimately keep rates unchanged after 10 straight hikes.”

Global Yields Climb as Traders Look to Fed Hike by July

Treasury yields were little changed at the start of trade in London on Thursday, with the 10-year around 3.8%, up about 10 basis points this week. Australia’s three-year yield jumped 17 basis points to 3.87%, the highest since 2011.

More hikes

Investors briefly anticipated a full quarter-point rate hike by the Fed by July and while they still expect some easing by the end of the year, multiple rate cuts rates have been excluded from the markets. This triggered further flattening of sections of the US yield curve.

All eyes will be on US inflation data next week, which will provide further clues to the Fed’s policy trajectory.

“As inflation has proven more tenacious than we thought, we now believe the central bank will keep its policy rate higher for longer than expected,” Diana Iovanel, an economist at Capital Economics, wrote in a note.

While some companies, including Societe Generale SA, believe US interest rates may already be at their peak, the same cannot be said for those in Europe. Traders are pricing the European Central Bank’s hikes at half a percentage point over the next three months, according to swap data.

The ECB is “behind the curve in terms of inflationary pressure, in terms of rates,” Guy Stear, head of fixed income research at SocGen, told Bloomberg Television. “They must continue.”

(Updates with additional commentary)

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