Global bonds slump as rate hike bets surge, stocks steady
Equities found temporary relief as oil retreated from panic highs, but surging expectations for aggressive central bank rate hikes pushed global bond yields to multi-decade peaks.
Equities in the US and Europe recovered slightly from recent losses as Brent crude pulled back from a two-month high. However, the relief in stock markets masked a severe repricing in sovereign debt, where yields remained near multi-decade peaks on resurgent inflation and rate hike fears.
Yields on 30-year Treasuries hovered near 2007 levels at 5.163%, while the benchmark 10-year yield touched an 18-month high of 4.713%. In Europe, German 10-year Bund yields held close to their highest point since 2011.
The bond selloff reflects a rapid shift in monetary policy expectations. Traders now price a one-in-three chance of a Federal Reserve rate hike next week and fully price a move by September, a stark reversal from just a week ago. For the European Central Bank, a September hike is about 70% priced in following a hold on Thursday.
Inflation anxieties are being driven by fresh geopolitical and trade shocks. Brent had surged 7% overnight to $102 after Houthi attacks on Saudi tankers threatened a second Middle East supply chokepoint alongside Iran's near-closure of the Strait of Hormuz. President Donald Trump threatened "major military punishment" for Iran and its allies as the US military conducted a 13th consecutive night of attacks. Simultaneously, news that the US administration will impose higher tariffs on goods from 60 trading partners compounded inflation worries.
The dollar index headed for its largest weekly gain in a month. "The dollar has been going up for a few days so clearly the risk has been building and the fact that oil has been at these higher levels for several days has really started to work through the cross-asset correlation," said Shaniel Ramjee, co-head of multi-asset investment at Pictet Asset Management. The yen remained pinned near 40-year lows at 163.73 per dollar, drawing warnings from both the US Treasury and Japan's finance minister.
Despite the rate fears, the pan-European STOXX 600 gained 0.8%, notching a second consecutive weekly rise. Wall Street traded higher, with the Dow Jones Industrial Average up 0.5% and the S&P 500 adding 0.4%. This occurred alongside mildly optimistic European data, with German private sector growth returning in July for the first time in four months.
Market strategists warn the turbulence in fixed income may persist. "As for the Fed, uncertainty around the outlook for both the policy rate and the balance sheet could weigh on the UST market over the next few months," wrote John Davies, U.S. rates strategist at Standard Chartered Bank. "Our base case remains an on-hold Fed, but we see a risk that the long-end might start to question whether Chair Warsh is only ready to ‘talk the talk’ rather than ‘walk the walk’ on delivering price stability."
Precious metals recovered slightly from prior session losses, with gold rising 0.4% to $4,064 an ounce and silver advancing 1.5%.
