Bonds are declining globally as investors consider the possibility of slower US interest rate cuts, a trend that could disrupt debt positions across the board.
Treasuries continued their losses, with the 10-year yield climbing back above 4.20% for the first time since July. The rate on equivalent German bonds also rose, reaching the highest level since early September. This downward trend spread to Asia, where the yield on Australian benchmark bonds surged as much as 16 basis points.
The selloff is mainly due to a reevaluation of the outlook for US monetary policy. Traders are scaling back their expectations for aggressive easing as the US economy remains strong and Federal Reserve officials have indicated a cautious approach to future rate cuts. Rising oil prices and the potential for larger fiscal deficits after upcoming elections are compounding the market’s concerns.
According to Ed Yardeni, founder of Yardeni Research, US 10-year yields could reach 4.5% early next year.
US 10-year yields rose to 4.22%, following a more than 10-basis point increase on Monday. Treasury volatility has reached its highest level this year, based on the ICE BofA Move Index tracking expected swings in US yields through options.
Traders have reduced their expectations for Fed interest rate cuts through September 2025 by more than 10 basis points since the end of last week, implying a Fed target rate between 3.50% and 3.75%.
Some market participants, such as Apollo Management, believe the central bank may keep rates unchanged at the next meeting, while T. Rowe Price anticipates US 10-year yields climbing to 5% next year due to shallower rate cuts and improving growth.
Bloomberg strategists suggest that Treasuries may face challenges in the coming months, with a tendency for yields to rise as the US economy remains resilient and supply concerns grow.
Other markets are also adjusting their outlooks. Swaps indicate that the Reserve Bank of Australia may only cut its benchmark rate by about 50 basis points by the end of August next year, half of what was previously priced in after the September policy meeting. Additionally, traders have moved up their forecast for the next Bank of Japan rate hike to June, compared to the previous expectation of later than July.
There is likely to be limited demand for long-term holdings of Japanese 10-year bonds in this environment, as noted by Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
Emerging-market bonds are also experiencing declines, with Indonesia’s five-year yield climbing seven basis points.
However, not everyone expects the selloff to continue gaining momentum. The Fed and Reserve Bank of New Zealand, among others, are currently in rate-cutting cycles, which could provide support for bonds.
In the meantime, concerns surrounding US debt supply, election hedging, and market anticipation of a Republican “red sweep” in the polls may lead to larger-than-usual fluctuations in Treasuries.
BlackRock Investment Institute is underweight shorter-maturity Treasuries, as they believe the Fed may not cut rates as drastically as the markets anticipate. They argue that factors such as an aging workforce, persistent budget deficits, and structural shifts like geopolitical fragmentation could keep inflation and policy rates higher in the medium term.
–With assistance from Haslinda Amin.
©2024 Bloomberg L.P.