Treasury Yields Rise as Global Bond Slide Extends Before Powell

(Bloomberg) -- Treasuries dropped in Asia as they reopened following a US long weekend, extending a global slide that began in the UK where investors grew concerned stubborn inflation will lead to more aggressive monetary tightening.

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US 10-year yields rose three basis points, after similar-maturity UK yields jumped eight basis points to their highest since September. Traders are betting the average central bank rate in developed markets will rise to 3.82% in a year, the highest forecast since early March. That means they have effectively priced out bets the financial-market stress that erupted with the collapse of Silicon Valley Bank will persuade policymakers to stop tightening.

Gilts led declines in government debt Monday before UK inflation data due Wednesday and a Bank of England policy decision the following day. Federal Reserve Chairman Jerome Powell is due to testify to Congress Wednesday, and his comments may put further weight on global bonds after the latest central bank decisions in Australia, Canada and the US were all more hawkish than anticipated.

“There is no question the momentum has shifted, with US yields climbing even after the Fed paused and University of Michigan inflation expectations dropped,” said Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore. “The prospect that the BOE and ECB will need to do more to get on top of inflation puts pressure on bonds globally.”

Buying on Dips

Even as markets price in higher global central bank rates, some investors are looking to buy bonds on a bet most of the policy tightening is already over.

“I have been adding,” said Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney. “Bonds put in their best innings in the pause after the hiking cycle. It doesn’t matter much whether we’re zero or three hikes away from the end, the bulk of the hiking cycle is behind us, and the lagged effect of previous hikes will bite down harder with the passing of time.”

Read more: UK Short-Term Borrowing Costs Reach 5% for First Time Since 2008

Australia’s bonds pared losses after minutes of this month’s central-bank meeting showed the surprise rate hike was a “finely balanced decision.” The nation’s 10-year yield was two basis points higher at 3.99%, after rising to a year-to-date high of 4.05% before the minutes were published.

Global government bonds have lost about 2% over the past three months, paring this year’s gain to about 1%, according to a Bloomberg index. Markets had expected central banks would respond to signs price pressures are easing by softening their stance, whereas policymakers instead remained aggressive on concerns inflation remain is in danger of remaining above their targets for too long.

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