The global bond rally is under threat from inflation surprises, weak auctions and central banks withdrawing support. Where it goes next depends on Federal Reserve Chair Jerome Powell and his take on the narrative of transitory price pressures.
UK gilts and rate-hike bets were rocked by inflation data on Wednesday that mirrored the upside surprise in the US the previous day. Meanwhile, the Reserve Bank of New Zealand unexpectedly ceased quantitative easing in a possible prelude to a rate hike, driving yields on benchmark bonds up by as much as 11 basis points to 1.78%. That turns the spotlight on the Bank of Canada, which is expected to pare bond purchases later Wednesday.
The moves in global bond markets come after a day after notable volatility in Treasuries, with weak demand for the monthly 30-year bond auction unleashing a bout of steepening. Benchmark 10-year yields surged five basis points to their highest in a week.
All that is weighing on traders ahead of Powell’s testimony to a House panel later on Wednesday, where legislators are likely to push him on the rapid price increases and demands to accelerate the Fed’s exit sequence.
Questions over the US policy path come against a backdrop of growing divergence between central banks like the RBNZ that are already easing off debt purchases, and those signaling more support, like the European Central Bank and People’s Bank of China.
“The US Treasury market is the market most capable of spooking others if yields all along the curve continue to rise,” said Steen Jakobsen, Chief Investment Officer at Saxo Bank. Given Powell’s testimony comes “just after the very hot June inflation print, the questions could be a bit more pointed on whether the Fed is allowing things to run too hot.”
US consumer price readings surged last month by the most since 2008, emboldening traders to bet the Federal Reserve will tighten policy in early 2023. That narrowed the gap between five- and 30-year yields toward the slimmest levels of 2021. It was whipsawed after the auction and has widened back to around 119 basis points on Wednesday, remaining well below an over six-year high of 167 basis points reached in February.
“The inflation genie could be out of the bottle as the inflation picture looks less and less transitory,” Sung Won Sohn, president of SS Economics and a professor at Loyola Marymount University wrote in a note. “To be sure, the supply bottlenecks, a surge in demand and the base effect explain some of the increases, but it is difficult to argue that everything will be back to normal in a few months.”
Fed officials foresee two hikes by the end of 2023, according to the median estimate of their projections published last month. Yet Boston President Fed Eric Rosengren as well as St. Louis Fed’s James Bullard, Dallas’s Robert Kaplan and Atlanta President Raphael Bostic have all publicly laid out a scenario in which the central bank would lift rates next year.
Now, the bond market is awaiting its cues from Powell and traders are bracing for any global repricing on any signs of a more hawkish approach.
US Treasuries pared some of Tuesday’s move, with 10-year yields down three basis points at 1.39% as of 7:48 a.m. in New York. After rising five basis points the previous day, yields on the long bond fell three basis points to 2.02%, narrowing its gap with the five-year notes slightly.
UK gilts underperformed Treasuries and bunds after the hot inflation print, with benchmark yields rising four basis points to 0.67% and the curve steepening.
“Overnight and today puts to bed the idea that the Fed is the only game in town,” said Jordan Rochester, a strategist at Nomura in London.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.
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