The global government bond sell-off deepened on Wednesday, with the 10-year US Treasury yield jumping above 1.4 per cent for the first time since the start of the coronavirus crisis.
European government bonds were also caught-up in Wednesday’s selling, sending yields on British, French, German and Italian bonds rising. The drop in prices is the latest leg of a broad shift away from government debt that has been driven by a more upbeat global economic outlook and rising concerns over inflation.
The 10-year Treasury yield rose as much as 0.09 percentage points on Wednesday to reach 1.4337 per cent, having started the year at around 0.9 per cent. Longer-term Treasuries faced more intense selling since they are more vulnerable to changes in inflation expectations.
The global bond market is suffering its worst start to a year since 2015 as investors grow increasingly confident that the rollout of Covid-19 vaccines will boost economic growth and fan serious inflationary pressures for the first time in decades.
“We may finally once again be on the road to reflation,” said Ed Yardeni of Yardeni Research. “I’m seeing more and more signs of mounting inflationary pressures as a result of the unprecedented stimulus that fiscal and monetary policymakers are providing in response to the pandemic.”
The Bloomberg Barclays Multiverse index tracking $70tn worth of debt has lost about 1.9 per cent since the end of last year, in total return terms that account for price changes and interest payments. If sustained, this would be the worst quarterly performance since mid-2018 and the sharpest first-quarter setback for the broad fixed income gauge in six years.
Germany’s 10-year Bund yield has risen from minus 0.62 per cent in mid-December to 0.29 per cent on Wednesday. Australia’s 10-year bond yield has already surpassed its pre-pandemic level and climbed another 0.05 percentage points on Wednesday to hit 1.61 per cent, while Japan’s this week poked above 0.1 per cent for the first time since 2018.
The bond market reversal started gathering steam in January, when the Democrats won control of the US Senate and raised the prospect of a more forceful stimulus package to heal the damage caused by the pandemic. But the sell-off has accelerated and broadened markedly in recent weeks, as some analysts and investors have grown more optimistic about the economic outlook and questioned whether central banks will continue to keep monetary policy accommodative.
The fixed income sell-off has started to ripple through global equities, and led some analysts to predict a repeat of past battles between bond markets and spendthrift governments and central banks.
Yardeni was the Wall Street analyst who was the first to coin the expression “bond vigilantes” in the early 1980s to describe how fixed income markets occasionally bullied governments and central banks into more austere policies. He now reckons they may be making a comeback.
“The bond vigilantes seem to be saddling up and getting ready to ambush the policymakers on the road to reflation,” he wrote in a note to clients on Tuesday. “It could be a heck of a shootout.”
Analysts say historically low bond yields have been a key fuel for the broad-based and dramatic rally across financial markets since the nadir in March 2020. Stocks are already showing signs that the pick-up in yields is biting.
Stock markets started 2021 on a tear, but the FTSE All-World Index has now dipped 2.5 per cent since hitting a record high on February 16. The technology-heavy Nasdaq 100 index has now declined more than 6 per cent since its peak last week.
Gregory Peters, a senior fund manager at PGIM Fixed Income, said the moves were reminiscent of a “mini taper tantrum 2.0”, a reference to when the Federal Reserve’s announcement in 2013 that it would curtail its bond-buying programme rattled global financial markets.
“The move higher is starting to spook other markets,” Peters said. “Stocks are squishy, and corporate bonds are squishy . . . It’s causing people to freak out a little.”
He suspects that the severity of the bond market sell-off may be getting overdone, but is — for now — wary of betting on the rout fizzling out. “When you’re staring down the barrel of double-digit GDP growth data, stimulus as far as the eye can see, and central banks on hold, you’d have to be brave to step in front of this,” he said.
The challenge is that central banks have committed to keeping monetary policy exceptionally easy even if inflation does accelerate — a commitment that some traders are now beginning to test.
Central banks appear to be growing perturbed at the sell-off, which has the potential to pump up lending rates at a delicate time for the global economy. The Reserve Bank of Australia restarted its bond purchases this week to quell the rise in its government bond yields, and European Central Bank president Christine Lagarde on Monday said that policymakers were “closely monitoring” the situation.
Fed chair Jay Powell on Tuesday hailed signs that the economic outlook was improving, but stressed that the US central bank would continue to stimulate demand for the foreseeable future, and argued that stubbornly low inflation was still a greater danger than a durable acceleration.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” Powell said in a prepared speech to Congress. “We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”