Global Bond Selloff Deepens With Longer Debt Leading Losses

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Global Bond Selloff Deepens With Longer Debt Leading Losses.

treasuries & bonds :: 1day ago :: source - bloomberg

By Ruth Carson

(Bloomberg) — Global bonds are facing renewed selling pressure as jitters around inflation, debt sales and fiscal discipline erode sentiment toward what had previously been some of the world’s safest assets.

Treasury yields advanced on Wednesday, with those on benchmark 30-year debt (^TYX) approaching to within a whisker of the closely watched 5% level. Yields on UK 30-year bonds increased to 5.75%, already the highest since 1998, while Japan’s 20-year notes climbed to the highest this century.

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Australian 10-year bond yields rose to levels last seen in July. Euro area debt bucked the global trend early Wednesday with benchmark borrowing costs snapping a three-day advance.

Taken together, the selloff reflects traders’ concerns around heavy government spending and the potential inflationary fallout worldwide. A deluge of corporate sales on Tuesday and uncertainty around the Federal Reserve’s independence are adding to the pressures.

“Deficit and debt issues cannot be easily or quickly addressed,” said Andrew Ticehurst, a strategist at Nomura Holdings Inc. in Sydney. “Steeper curves are the new normal.”

A Bloomberg gauge of global bond returns fell 0.4% on Tuesday, the biggest one-day loss since June 6. While the index is still up for the year, the recent retreat underscores ongoing edginess around owning longer-maturity debt.

Meanwhile the yield to maturity on Bloomberg’s global gauge of government bonds maturing in a decade or longer climbed to the highest level since July 2009.

The selloff in long bonds is boosting demand for so-called steepeners — a popular strategy that profits when the spread between long- and short-term bond yields widens.

There’s been precedence for this trade to make money in the past few weeks. New Zealand’s yield curve steepened in August after the central bank followed a widely expected interest-rate cut with a surprisingly dovish statement. Bank Indonesia also unexpectedly cut rates last month.

Rising US 30-year yields and falling two-year ones marks “an unusual situation reflecting investors’ wish for more compensation to hold long-term bonds,” BlackRock Investment Institute strategists including Wei Li wrote in a note.

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As pressure builds on the Fed to lower rates, traders typically buy shorter-dated notes that are the most sensitive to changes in monetary policy.

Franklin Templeton’s Andrew Canobi is among those positioning for two-year Treasuries to outperform their 10-year peers.

“Inflation is being dragged kicking and screaming back towards target, fiscal pressures are significant, labor markets are still broadly solid and central banks are cutting amidst this,” said Canobi, a money manager in Melbourne. “We are biased to add rather than reduce” the positions.