Global Bond Rout Extends as Three Half-Point Fed Hikes Priced In

(Bloomberg) -- Global bonds added to this year's epic rout as traders brace for the most aggressive Federal Reserve interest-rate hikes in 40 years and the likelihood most global central banks will also tighten. 

The policy-sensitive two-year yield climbed as much as eight basis points on Friday to 2.76%, the highest since late 2018, after Fed Chair Jerome Powell said overnight “it is appropriate in my view to be moving a little more quickly.” Ten-year Treasury yields jumped to 2.95%.

“The 3% yield on the 10-year U.S. Treasury is an important psychological barrier, and should this be reached in the coming days it would only add to the already formidable challenges currently roiling the bond markets,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “Right now, rates are the overwhelming force dominating the fixed-income markets.”

Australian and New Zealand bonds also slid, as the bearish tone in debt markets was reinforced by heightened investor expectations for interest-rate increases by the European Central Bank, which sent euro-area debt tumbling. Australian 10-year yields rose as much as eight basis points to 3.16%, a level last seen in 2014, while similar-dated New Zealand notes traded five basis points higher at 3.56%. Japanese bonds were a sea of calm as the central bank there extended its intervention in the market. The 10-year yield was steady at 0.245%, just below the 0.25% top of the Bank of Japan's target range. 

“Fifty-basis-point hikes in May and June are reasonable, while 50 in July will depend on the how the data plays out in the next few months,” Ben Jeffery, rates strategist at BMO Capital Markets, said of the outlook for Fed interest rate increases.

Powell Hardens Hawkish Pivot Toward Half-Point Fed Rate Hikes

Such a set of hikes would represent the sharpest tightening since January 1982, when the Fed raised its benchmark by 3 percentage points in one go. The last half-point increase was in May 2000. In subsequent cycles, the U.S. central bank raised rates exclusively in quarter-point steps that were clearly telegraphed to the bond market.

With headline and core inflation running at the fastest annual rates since the early 1980s, Powell and other Fed officials have signaled they're prepared to raise rates in half-point increments if necessary, after the quarter-point hike in March. St. Louis Fed President James Bullard even flagged the potential the central bank might have to consider a 0.75 point increase.

Nomura Holdings Inc. ramped up its forecasts, saying it now expects the Fed to hike by 0.75 at both its June and July meetings, following an expected half-point May move

All told, the U.S. rates market now expects 2.43 percentage points of additional rate hikes by the Fed's December meeting, a rise of about 30 basis points since the close on Monday. The benchmark rate is currently in a range of 0.25-0.50%.

Asian emerging-market debt may get hit hard as 10-year Treasury yields surge toward 3%. Malaysia's 10-year yield rose six basis points Friday to 4.25%, a level last seen in 2018. Higher duration bonds within EM corporates and sovereigns are among the most vulnerable, said Bank of Singapore's Schubert.

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