Global Bond Yields Touch New Milestones With Rate Hikes Looming

(Bloomberg) -- Global government bond yields hit new heights as investors prepared for further rate hikes from central banks to temper scorching inflation.

Germany's 10-year yield climbed to touch 1% for the first time since 2015 before pulling back, while the corresponding U.K. rate surged above 2% for the first time in more than a week. Benchmark Treasury yields slipped on Tuesday after surging above 3% late on Monday.

The moves come ahead of meetings this week at the Federal Reserve and the Bank of England, which are both expected to raise rates even as concerns mount over weakening global growth. Russia's war in Ukraine and China's strict coronavirus lockdowns prompted the International Monetary Fund to downgrade growth estimates last month.

“The monetary hawks are taking flight,” Generali Insurance Asset Management SpA research analysts including Vincent Chaigneau wrote in a note. “Complacent on inflation for too long, the Fed is rushing into sizeable rate hikes while ECB officials are mulling a hasty lift-off as soon as July.”

The Treasury curve flattened with two-year yields rising to near a 2018-high touched last month. The Fed is widely expected to increase its key benchmark rate by a half-percentage point on Wednesday and leave the door open for further hikes of that magnitude this year.

Germany's 10-year yield rose as much as five basis points to nearly 1.02%, a level not seen since the bloc was in the middle of grappling with the Greek debt crisis. It's a sharp turnaround from March when demand for havens after Russia's invasion of Ukraine sent the rate into negative territory.

“The market looks in poor shape with few investors willing to take the other side given the entrenched bearish dynamics,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “Inflation risks are not getting any smaller, while risk sentiment is recovering.”

Money markets are wagering on almost four 25 basis-point hikes from the ECB this year, ratcheting up bets as euro-area inflation continues to break records and a growing number of ECB officials acknowledge the possibility of policy tightening. Vice President Luis de Guindos said an ECB rate increase in July is possible but not “likely,” in an interview published Sunday.

Bank of England Poised to Boost Interest Rates to 13-Year High

U.K. bonds were also caught up in the rush to offload debt, with yields surging as domestic markets reopened after being closed Monday for a holiday. Money markets are betting on a quarter-point BOE rate hike this Thursday and are rapidly raising wagers on a half-point increase at any of its next four meetings.

In Australia, the three-year yield topped 3% for the first time since 2014 after the Reserve Bank, one of the developed world's last remaining doves, turned hawkish. It increased interest rates by more than economists anticipated, and signaled further hikes to come.