Wednesday, January 19

Bond curves blink with growth warning

The collapse of the global sovereign debt yield curve is accelerating, sending a foreboding signal to central banks that the withdrawal of stimulus risks triggering a slowdown in economic growth.

The shrinking gap between short-term and long-term yields, which has been driven by central banks removing accommodative policies or preparing to do so, gained momentum on Wednesday as the UK’s 30-year rates plunged further since March 2020 as the nation cut issuance plans. and yields on US Treasuries with similar maturities fell as much as 11 basis points. Australia’s benchmark curve is the narrowest since November 2020 due to speculation that faster inflation will force the central bank to act.

The moves come as global market players have been increasing prospects for tightening policies. The shift may be reinforced after Brazil’s central bank delivered its biggest increase in interest rates in nearly two decades and with the meeting of Europe’s policy makers on Thursday.

“In general, investors have to cope with the prospect of central banks facing a massive rise in cost-driving inflation and subsequently inflation expectations,” said James Athey, chief investment officer at Aberdeen Asset. Management. “Central banks started a fire and then poured gasoline on it. Now they have to deal with it. ”

In the US, the world’s largest government bond market, 30-year yields were already falling this week as pension purchases increased. Meanwhile, short-term rates appear poised to rise as money market traders forecast two interest rate hikes from the Federal Reserve in 2022 in a bet that inflationary pressures will not ease.

A rally on Wednesday brought 30-year US Treasury yields below 2% for the first time in a month with the biggest drop since July. That narrowed the gap with five-year yields to just 78 basis points, a level last seen in March 2020.

Australian 10-year yields fell 3 basis points to 1.78% in early trading Thursday and shorter yields rose after CPI data showed stronger-than-expected core inflation yesterday. Traders are now betting on the possibility of four rate hikes in one year.

Moving from Canada

Peter Boockvar, chief investment officer at Bleakley Advisory Group, was especially impressed by the Bank of Canada’s move. That “was not expected and reminds us all that monetary tightening is a global trend at the moment,” he wrote in a note.

In the UK, 30-year yields fell to around 1.14%.

The lack of liquidity exacerbated the rate sell-off in smaller bond markets in countries like Australia, as investors scrambled to price in a more aggressive central bank tightening, according to Aberdeen’s Athey. The Australian three-year yield rose as much as 24 basis points to 1.01% after a government report showed core inflation rose to a six-year high. Yields on the April 2024 note soared to double the 0.1% level targeted by the Reserve Bank of Australia.

Following the Reserve Bank of New Zealand rally in early October, markets are already pricing in a second rally at the November meeting as it faces pressure to take action in the face of rising market prices. consumer.

“Central banks are responding more aggressively to inflation,” said John Briggs, global head of desk strategy at NatWest Markets in Stamford, Connecticut. “So markets are setting prices at central banks, which indicates the likelihood of higher rates, so the curves flatten in response.”

© 2021 Bloomberg

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