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Treasuries Lead Global Rout Driving Yields to Highest Since 2020

·3-min read

(Bloomberg) -- Treasury yields surged toward the highest levels since early 2020, leading a global bond selloff driven by rising energy costs and speculation that the Federal Reserve will start pulling back on its massive debt purchases.

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The two-year U.S. Treasury yield rose as much as 4 basis points to hit 0.32% on Tuesday, with traders attributing the move mainly to a rollover in the benchmark note following soft demand at Monday’s auction. Yields on 30-year Treasuries surged as much as 11 basis points, extending their rise since the hawkish Fed meeting last week to almost 30 basis points, the most for such a span in 18 months. U.K. 10-year yields rose above 1% for the first time since March 2020.

Global bond yields have been climbing since last week, when the Fed signaled that it may begin taping its purchases of Treasuries and mortgage-backed securities in November, while central banks in the U.K. and Norway turned hawkish. An escalating power crunch across Europe and China is also keeping bond investors on edge amid concern of a surge in energy prices globally. Brent crude futures topped $80 per barrel before heading lower.

On Tuesday, traders ramped up their bets for a more aggressive central bank tightening after St. Louis Fed President James Bullard told Reuters that he sees two interest-rate increases next year. Overnight swap rates suggest that traders are expecting the Fed to raise borrowing costs as soon as September 2022.

Some investors have been anticipating the selloff. A JPMorgan Chase & Co. survey showed that a net 25% of its clients held short Treasury positions as of Monday, up from 20% the previous week. Primary dealers surveyed by Bloomberg News earlier this month predicted on average that 10-year rates will rise to 1.69% by year-end, compared with the current level of 1.53%.

“Markets are re-evaluating the outlook for monetary policy going forward,” Andrew Pease, global head of investment strategy at Russell Investments, said in a Bloomberg Television interview. “There is a bit more upside for yields going further, and I think we’re in the process of re-normalizing those longer ends of yield curves.”

Treasuries Face Risk of Prolonged Selloff From Convexity Hedging

Rising Energy Costs Felt in Treasuries as Yields Sync With Oil

Treasury Bill Yields Skyrocket as Debt Limit Gets Drop-Dead Date

Treasury futures volumes were at more than twice usual levels in Asia trading and early in Europe, with most activity seen in 10-year note contract. Eurodollar futures volumes were also well above recent average.

Yields remained high after a $62 billion sale of seven-year Treasury notes drew solid demand and concluded a busy week of bond auctions.

Beyond auctions, Treasuries face headwinds from negotiations in Congress to increase the federal debt limit and avert an unprecedented default. The selloff in Treasury bills ramped up Tuesday, with mid-October yields surging more than other tenors, after Treasury Secretary Janet Yellen warned Congress the government will run out of funding by Oct. 18 without raising or suspending the debt limit. Hedging flows linked to mortgage-backed securities and a cold shoulder from Japanese investors are also seen among hurdles for U.S. bonds.

Reflecting Fundamentals

“Dollar rates are waking from their summer doldrums,” said Eugene Leow, rates strategist at DBS Bank Ltd. in Singapore. “They are more reflective of fundamentals now, paring the excessive pessimism on the economy. I do see further upward pressures on U.S. yields, but perhaps at a more moderate pace.”

The Fed isn’t the only major central bank to signal an unwinding of crisis-era stimulus. The Bank of England surprised markets on Thursday when it left the door open for a potential rate hike as soon as November if necessary, and Norway delivered the first post-crisis hike among Group-of-10 countries on the same day.

(Adds markets context.)

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