Global government bond yields extended their climb — with the US 30-year reaching the highest point since 2011 and other benchmarks returning to 2008 levels — as resilient economic data challenges the view that central bank rates are peaking.
Both five- and 10-year Treasury yields rose Thursday to within a few basis points of their 2022 highs. The 30-year yield advanced as much as seven basis points to 4.42%, putting it well above the less than 4% level it traded at as recently as July 31. The US 10-year yield climbed to as high as 4.33%, up nearly eight basis points. The equivalent UK yield jumped to a 15-year high, while its German counterpart approached the highest since 2011.
Treasuries have led the global debt selloff as the US economy defies expectations that more than five percentage points of Federal Reserve interest-rate hikes would cause a recession. Officials at the last policy meeting remained concerned that inflation would fail to recede, requiring further tightening, minutes of the meeting released Wednesday showed.
“We do think there is a possibility that you get an additional Fed rate hike later this year to sort of make sure that there’s an insurance policy that inflation remains contained,” said Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co., which oversees $1.8 trillion in assets.
Treasury yields remained near session highs after the weekly tally of jobless claims suggested the labor market remains resilient.
Contributing to the selloff in the asset class, Japan — which has the developed world’s lowest interest rates thanks to its ultra-easy monetary policy — saw weak investor interest when selling 20-year notes Thursday.
The yield on a Bloomberg index for total returns on global sovereign debt rose to 3.3% Wednesday, the highest since August 2008. Sovereign bonds worldwide have handed investors a loss of 1.2% this year, making the asset class the worst performer across Bloomberg’s major debt indexes.
It’s a reversal from the start of the year, when optimism that rate hikes were close to ending sent global bonds soaring, with the Bloomberg Global Aggregate benchmark jumping more than 3% in January for its best opening month to a year on record. The gauge slid Wednesday to be down 0.1% for the year.
Investors Pile In
The higher yields in the US continue to draw in buyers. Investors pumped $127 billion this year into funds that invest in Treasuries, on pace for a record year, Bank of America Corp. said last week, citing data from EPFR Global.
Asset managers boosted long positions in Treasury futures to a record in the week to Aug. 8, according to Commodity Futures Trading Commission data. JPMorgan Chase & Co.’s client survey showed long positions in the week to Aug. 14 matched the peak set in 2019, which was the highest since the financial crisis.
Global bonds in particular are looking attractive given that yields worldwide are being lifted by the US at a time when numerous economies are showing weakness, said Steven Major, global head of fixed-income research at HSBC Holdings Plc.
“Much of the bear case for bonds is cyclical and local to the US,” Major wrote. “It therefore misses the global backdrop, along with longer-run structural drivers. The fact that some emerging-market central banks are already easing tells us that inflation is falling fast or that they have cyclical and structural headwinds.”
Global bonds are positioned to outperform within six to 12 months because central banks are getting close to the end of their rate-hike cycles, Western Asset Management said this week.
But Treasuries have also been under pressure by expectations the US government will issue more bonds in the coming quarter to plug widening federal deficits. US 10-year yields have jumped more than 30 basis points in August, set for the biggest monthly increase since February.
“There is a reasonable likelihood that as supply comes to the market investors will have to be encouraged with some additional premium in higher yields,” said Pimco’s Schneider.
The latest increases in US yields have been led by the inflation-protected variety, representing the risk-free rate of return investors demand, based on their expectations for how riskier assets are likely to perform. The so-called real yield on 30-year Treasury Inflation-Protected Securities is above 2% for the first time since 2011, while the 10-year benchmark traded just shy of 2% Thursday, a level last seen in 2009.
With elevated real rates, “the bond market is adding a lot of risk premium to it, to the risk that at some point maybe in the one-year, two-year point in the future the Fed will have to perhaps resume tightening,” Dominic Konstam, head of macro strategy at Mizuho Securities US LLC, said on Bloomberg Television. “Ironically that may be exactly what the Fed needs to actually break this labor market.”
--With assistance from Liz Capo McCormick, James Hirai, Nicholas Reynolds, Neil Chatterjee, Neha D'silva, Aline Oyamada and Carter Johnson.
(Updates rates throughout.)
