The central banks’ aggressive interest rate hikes could cause a heavy selloff, strategists reportedly warn
Global government bonds are on course for their worst performance since 1949 as losses mount in the face of aggressive central banks, Bloomberg reported over the weekend citing Bank of America projections.
According to the report, the escalating losses reflect how far the US Federal Reserve and other central banks have shifted away from the monetary policies of the Covid pandemic, when they held rates near zero to keep their economies going. The reversal has hit everything from stock prices to oil as investors brace for an economic slowdown.
On Friday, the UK’s five-year bonds plummeted by the most since 1992 after the government rolled out a massive tax-cut plan. Two-year US Treasuries are in the middle of the longest losing streak since at least 1976, falling for 12 straight days.
“Bottom line, all those years of central bank interest-rate suppression – poof, gone,” Peter Boockvar, chief investment officer at Bleakley Advisory Group told the media outlet. “These bonds are trading like emerging market bonds, and the biggest financial bubble in the history of bubbles, that of sovereign bonds, continues to deflate,” he explained.
The Fed raised its policy-rate range to 3.25% on Wednesday, which is its third straight 75-basis-point hike, hinting further increases beyond 4.5%.
“With more Fed rate hiking coming and quantitative tightening, as well as the possibly more government debt issuance down the road amid less Treasury buyers out there now, it all just means higher rates,” managing director at Mischler Financial Glen Capelo said, adding: “The 10-year yield is definitely going to get closer to 4%.”
According to Bloomberg, in the coming week the market may face fresh volatility from the release of inflation data and public speaking engagements by Fed officials. Also, the sale of new two-, five- and seven-year Treasuries will likely spur trading volatility in those benchmarks, it reports.
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