(Bloomberg) -- Sovereign bonds slumped in Australia and New Zealand after U.S. inflation accelerated to a fresh 40-year high, underscoring global concern that price pressures were getting out of hand even before the recent surge in oil.
Australia's 10-year yields climbed as much as six basis points to 2.43%, the highest since March 2020, while similar-maturity New Zealand yields topped 3% for the first time since 2018. New Zealand food prices jumped at the fastest annual pace in over a decade, data published Friday showed, after U.S. figures released Thursday showed consumer prices surged at an annual rate of 7.9%.
Treasury yields have risen more than 20 basis points across the curve this week, and there have been even steeper increases in some European markets, where the economic impact of the war in Ukraine is more acute. The European Central Bank's unexpected decision on Thursday to bring forward the end of its asset-purchase program added to concern that soaring raw-material costs will push policy makers worldwide to accelerate plans to withdraw accommodation.
“As long as commodity prices continue to trend higher, so too will global interest rates continue to rise, since markets expect central banks will need to respond via higher policy rates,” said Imre Speizer, a strategist at Westpac Banking Corp. in Auckland.
Supply Pipeline
Supply pressures are also pushing yields higher. In addition to this week's Treasury auctions and one of the biggest corporate-bond offerings on record Wednesday, the Federal Reserve is ending its bond-purchase program, and there's potential for massive joint bond sales by the European Union to finance energy and defense spending.
Treasury 10-year yields declined two basis points to 1.97% on Friday in Asia, though they have still climbed 23 basis points this week. Swaps markets are pricing in a certainty that the Federal Open Market Committee will raise the U.S. benchmark rate by 25 basis points at its March 15-16 gathering, and follow that up with five more hikes over the remaining six meetings this year.
Read More: U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike
“We believe the FOMC is already behind the curve and will remain focused on fighting inflation and expect more tightening by the FOMC than is currently priced,” said Belinda Allen, senior economist at Commonwealth Bank of Australia in Sydney. “The focus at the meeting will be on comments around the impact of the war on U.S. inflation and economic activity,” given Chairman Jerome Powell has already signaled a hike is coming, she said.
Overseas funds look to be pulling back from Australian and New Zealand debt as the impact of Russia's invasion of Ukraine roils global bond markets. The extra yield investors demand to hold the 10-year notes of the two South Pacific nations instead of Treasuries has climbed over the past month to be close to multi-year highs touched in late 2021.
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