Rate-Hike Bets Are Unwinding and Taking Bond Yields With Them

(Bloomberg) -- Sovereign bonds surged in Japan, Australia and New Zealand on Wednesday, extending a global rally as Russia's invasion of Ukraine spurred a flight to the safety of government debt.

The soaring demand comes as traders slash bets on interest-rate hikes from developed-markets central banks, swelling the world's pile of negative-yielding sovereign bonds by $3 trillion in two days.

“Markets are bracing for a drawn-out conflict and appear to be focusing more on the negative growth implications than inflation risks,” Australia & New Zealand Banking Group Ltd. strategists including Brian Martin wrote in a note. Expectations for the Federal Reserve to hike by 50 basis points have faded and investors are turning to Treasuries as liquidity deteriorates, they said.

Growth fears were also evident in the selloff in stocks, while the prospect of supply shortages ripped through commodity markets, sending crude oil to $110 a barrel and wheat futures to a 14-year high.

Australia's 10-year yields slipped as much as 11 basis points to 2.07%. Their New Zealand counterparts slumped 13 basis points before recouping much of the fall.

War Risk, Liquidity Squeeze Spur Bets on a Less Aggressive Fed

Japan's benchmark 10-year bond yield, which typically moves in the tiniest of increments, dropped 3.5 basis points to 0.135% and headed for the lowest close since January.

Meanwhile, hedge funds look to have helped fuel the biggest gain in the country's bond futures in a year, with ten-year contracts jumping as much as 58 ticks to 151.17.

Hedge Funds Close Out Short Bets on Japanese Bonds in a Hurry

Treasuries, which have led global gains this week, were little changed in Asian trading as investors weighed the risk of stagflation. There were also signs overnight of some short-covering in U.S. bonds.

Treasuries further out the curve were said by some traders to have benefited from stop-loss buying by speculative accounts that had been positioned to benefit from higher yields.

Leveraged funds increased short positions in 30-year bond futures to 532,000 contracts in the week ended Feb. 22, the strongest bets on declines in the securities since March 2020, according to Commitments of Traders data from the Commodity Futures Trading Commission.

Money-market traders have priced out any risk the Fed will start its tightening campaign with a half-point increase this month, once seen as a near certainty. They've also marked down where the benchmark rate will peak, to around 1.7%, which is a drop of over 20 basis points from previous expectations.

Stop-Out Buying Supports Treasuries Rally; Swap Spreads Crushed

“It is very hard to know where bond yields go in the near term as we are at the mercy of unpredictable headlines around Russia/Ukraine,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “We are wary that we could see more covering of short positions in the bond market, which could send yields still lower. Positioning data has been suggesting very large short positions.”

German 10-year yields slid 21 basis points to minus 0.07%, the largest daily decrease since 2011 as rates traders bet the European Central Bank will put off raising interest rates until next year.