It is not just the US, bond markets across the globe are bearing the brunt of rising government debt and higher energy prices. The 30-year yield in the UK has hit the highest level since 1998, while bond yields in Germany and France have also hit multi-year highs.
Bond yields have surged despite interventions by the US treasury, which had earlier promised to buyback bonds worth $6 billion last week, but ended up buying only $5.14 billion, further disappointing the market, and pushing yields higher. The further bond buying schedule announced has pegged the minimum buyback size at $4 billion from the $2 billion promised earlier, but the market will be closely watching what the final quantum turns out to be.
And the pressure may only increase as many large holders of US treasury are looking to push more supply into the market.
According to a Bloomberg report on September 12, Japan’s Government Pension Investment Fund could sell US treasuries worth up to $62 billion, citing a report from Banco Santander SA.
The news comes after a GPIF meeting last month, which spoke about reconsidering its allocation to foreign bonds in favour of local debt. After years of interest rates being at rock bottom, the Bank of Japan has embarked on a rate hike cycle, taking its 10-year yield to 3%, a first since 1996. This is also driven by concerns that the central bank may need to raise rates faster than expected, to tame the rising inflation and also due to concerns over fiscal spending.
Japan, the largest holder of US Treasuries (Over $1 trillion), spent nearly $100 billion to defend the Yen against the US Dollar between late-July and August.
The world’s largest sovereign wealth fund does not want to be left too far behind when it comes to its own portfolio re-assessment. Reports suggest that Norway’s $2.3 trillion sovereign wealth fund, plans to sell US treasuries worth nearly $80 billion, out of its current $215 billion worth of holdings.
Norges Bank Investment Management intends to increase its exposure to non-government debt, including mortgage-backed securities, while also increasing its allocation to Japanese government bonds.
According to Mohammed El-Erian, the global bond market sell-off may not be over just yet as governments, companies and hyperscalers issue large amounts of debt. He added that if bond supply grows faster than demand, bond prices will have to fall to attract buyers, thereby pushing yields higher, putting further pressure on the US Government’s borrowing costs.
A Lot At Stake For The Fed
The rising yields, coupled with higher inflation and energy prices has raised stakes for Fed Chair Kevin Warsh ahead of the central bank’s decision on Wednesday. The probability of the Fed raising rates by 25 basis points is now nearing 90% after last Friday’s inflation data.
Tracy Chan of Brandywine Global Asset Management said that she expects the yields to head higher in the medium-term. While she did not give a specific figure, she said definitely beyond the 5% mark. She also added that the Fed is behind the curve when it comes to rates.
While there is no concrete historical co-relation of the equity markets reacting negatively to the bond yields crossing the 5% mark, it is often seen as a key pivot point and higher yields end up impacting corporate earnings as well. Moreover, such high level of yields could just push equity investors into the bond markets due to higher fixed income payouts.
JPMorgan’s Grace Peters, in a note last week said that there could be some “indigestion” from the equity markets in case the 10-year yield surges towards the 5% or the 5.25% mark.
Among the rate hawks, Bank of America still expects the Fed to hike in all the remaining meetings this year, while Citi believes that the Fed’s next move will still be a cut and they would not want to hike interest rates.
With oil prices crossing the $100 a barrel mark, this month’s inflation print, which will be reported in October, becomes crucial to watch. Another hotter-than-expected print would end up putting more pressure on the market and also put the Fed on collision course with US President Donald Trump who wants the US to have the lowest interest rates in the world.
Over to September 16.
(With Inputs From Agencies.)
