(Bloomberg) — Bonds from Australia to Japan are falling as investors consider the prospects of slower rate cuts in the U.S., a trend that risks putting debt positions everywhere at risk.
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Ten-year Australian government bond yields rose as much as 15 basis points, New Zealand’s ten-year yield rose seven basis points, while Japan’s rose three basis points to 0.985%, the highest level in two months. That followed an 11 basis point rise in US yields on comparable maturities on Monday.
At the heart of the global debt sell-off is investors’ search for the Federal Reserve’s rate cut expectations and whether they once again appear exaggerated. A robust US economy, rising chances of a Donald Trump election victory and cautious comments from Fed officials on the pace of monetary easing are clouding the profit outlook for bond traders around the world.
“We’ll probably see 4.5% early next year” for the U.S. 10-year yield, Ed Yardeni, founder of Yardeni Research, said in an interview on Bloomberg Television. A rise in interest rates to 5% would “depend largely on the election results – if we get a Democratic or Republican victory, it almost doesn’t matter. Either way we will have bigger deficits,” he said.
Overnight indexed swaps suggest that a 25 basis point Fed rate cut next month is no longer a certainty.
Apollo Management is among those who see the central bank possibly keeping rates on hold at its next meeting, while T. Rowe Price sees US 10-year yields rising to 5% next year on the risk of smaller rate cuts and as growth improves .
The US 10-year yield rose another basis point to 4.21% in Asia on Tuesday.
What Bloomberg Strategists Say…
“Governments may struggle in the coming months, with a strong upward trend for yields as the US economy remains resilient and supply concerns increase.”
Garfield Reynolds, Markets Live Strategist
Repricing on tariff paths also occurs elsewhere.
Swaps indicate the Reserve Bank of Australia will cut rates by only about 50 basis points until the end of August next year, half of what was priced in after the September policy meeting. Similarly, traders pushed their forecast for the Bank of Japan’s next rate hike to June, up from later than July last month.
Demand for long-term investments in Japanese “10-year bonds, which carry relatively high interest rate risk, is likely to be muted in this environment,” said Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, wrote in a research note.
Emerging market bonds are also falling, while the Indonesian five-year yield is rising by six basis points.
Not everyone expects the sell-off to gain momentum. The Fed and the Reserve Bank of New Zealand, among others, are in the midst of rate-cutting cycles, which should generate an underlying bid for bonds.
“From here on out, we’re likely to see a slight correction,” said Lucinda Haremza, vice president of fixed income sales at Mizuho Securities in Singapore. There is “the risk of a stronger rally due to rising tensions in the Middle East or a Harris election victory,” she said.
For now, however, issues surrounding US debt supply, election hedging and markets leading the risks of a Republican red sweep in the polls may continue to weigh on bonds.
BlackRock Investment Institute is one of the underweight government bonds with a shorter duration.
“We don’t think the Fed will cut rates as sharply as markets expect,” firm strategists including Wei Li wrote in a note. An aging workforce, persistent budget deficits and the impact of structural shifts such as geopolitical fragmentation should “keep inflation and policy rates higher over the medium term,” they wrote.
–With help from Haslinda Amin.
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