Record Bond Rout Deepens as Treasuries, German Debt Resume Drop

(Bloomberg) — Treasuries and European debt resumed losses after a day of relief, further battering global bonds caught in a historic downturn.

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U.S. 10-year yields jumped as much as 10 basis points on Thursday, and the gap between five- and 30-year yields shrank to narrowest in 15 years. Five-year German rates jumped to a seven-year high, while French 10-year yields hit 1% for the first time since 2018.

The moves come in a week wherein Federal Reserve Chair Jerome Powell and his colleagues sounded an increasingly hawkish tone to combat the fastest inflation in four decades. That has spurred record losses for bond investors, driving the Bloomberg Global Aggregate Index down about 11% from a high in January 2021, which equates to a drop in the index market value of about $2.6 trillion.

“A near-term floor has been put under bond yields as the Fed grapples with cyclically elevated inflation expectations,” HSBC Holdings Plc strategists including Steven Major wrote in a note. “Tightening has only just started and the Fed indicates it will need to go beyond its measure of neutrality to achieve longer-run objectives.”

HSBC strategists lifted their year-end 10-year Treasury yield forecast to 2%, from 1.50% previously. The median forecast among analysts surveyed by Bloomberg shows a steeper increase to 2.25%.

The global bond rout has been led by shorter-dated debt, raising concern that yield curves will invert — a development typically seen as a negative sign for the economy because it signals the expected severity of central bank tightening risks helping to set off a recession.

“Yield momentum remains to the upside across the curve, but the moves higher are likely to be larger at the front end,” said Prashant Newnaha, an Asia-Pacific rates strategist at TD Securities in Singapore.

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Treasuries had rallied Wednesday after demand rose at an auction of 20-year bonds due to the recent increase in yields and a smaller size of the offering.

(Updates throughout.)

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