Global bond markets have declared that the steepest global monetary tightening campaign in a generation is as good as done.
(Bloomberg) — Global bond markets have declared that the steepest global monetary tightening campaign in a generation is as good as done.
In the span of days, traders have dramatically unwound bets on further rate hikes and current pricing shows that the Federal Reserve is likely going to increase rates by 25 basis points one more time. Traders now see the upper range of the US target range at about 5.1% mid-year, down from 5.9% last week.
Many strategists have followed suit, saying that the collapse of Silicon Valley Bank has sent such a shockwave through financial markets that it will force the Fed to go easier on its approach. Goldman Sachs Group Inc. now expects the Fed to keep rates on hold at its March 21-22 meeting, while Nomura Securities has gone a step further and forecasts a cut and a halt to bond sales.
“We believe the Fed is near its peak,” said Seyran Naib, a strategist at Skandinaviska Enskilda Banken AB. “When credit conditions and spreads are now tightened, the market does the job for the Fed, reducing the need for further rate hikes.”
To Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney, the fact that two-year yields fell below cash rates is a sign that the hiking cycle will end.
The first US bank failure since 2008 has turbocharged concern that policymakers’ efforts to quash inflation — led by the Fed’s 4.5 percentage points of rate hikes in the space of a year — will tip economies into recession.
US yields climbed on Tuesday, paring some of yesterday’s retreat. On Monday, two-year rates fell by more than half a percentage point in the biggest move since the 1980s.
Money markets are still betting on a rate increase in either March or May, followed by a reversal in June. The central bank’s upper bound is expected to come down to about 4.4% by year-end, from 4.75%, according to swaps tied to policy dates.
Investors risk another painful unwind similar to February’s rout by restoring bets on a rapid pivot from central banks, according to PGIM Ltd. The SVB crisis may end up being much like last year’s UK pension rout, which prompted intervention from the Bank of England, but didn’t stop UK policymakers from hiking rates, he said.
“Markets believe that central banks will pivot before a recession, whereas my view is the central banks will tighten until they’ve got control of inflation,” said Jonathan Butler, co-head of global high yield at PGIM, a company with $1.2 trillion of assets under management. “Central banks are going to be more hawkish than the market believes.”
Australian three-year yields closed at 3.05%, some 55 basis points below the Reserve Bank of Australia’s cash-rate target. That’s the widest discount since 2015, when the RBA was busy cutting interest rates. Swaps traders have now priced out further hikes for the RBA, after last week seeing two more hikes in 2023.
The European Central Bank now stands as the leading hawk among global policymakers, according to swaps traders, who see it raising rates by more than 100 basis points by October.
But there too, the path isn’t certain. The ECB’s plans for more big rate hikes are set to meet stronger opposition this week after the collapse of SVB, according to officials with knowledge of the matter.
(Updates moves throughout.)
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