Doggedly strong US employment is causing pressure on bond markets far from American shores with a gauge of global yields climbing to the highest since 2008.
(Bloomberg) — Doggedly strong US employment is causing pressure on bond markets far from American shores with a gauge of global yields climbing to the highest since 2008.
Bond bulls worldwide are bracing for the key US non-farm payrolls figure Friday after Treasuries tanked on Thursday when stronger-than-expected labor data boosting expectations for interest rates. Benchmark Treasury yields have rocketed back through 4% and those on Bloomberg’s index of global government bonds have hit levels last seen in the financial crisis.
“How long is a piece of string?” was the response from Amy Xie Patrick, head of income strategies at Pendal Group Ltd., when asked how high Treasury yields can go. “The time to lean long again will come sooner than we think, but I am preferring not to fight momentum here.”
The 10-year Treasury yield — the de-facto global bond benchmark — has broken above its recent downtrend, leaving chart watchers speculating over how high it could climb. A close above the 4.09% zone would open up the door to last year’s high of 4.34%, according to RBC Capital Markets strategist George Davis.
Sumitomo Mitsui Banking Corp. chief strategist Daisuke Uno sees the potential for the US 10-year yield to even hit 6% this year.
“Looking at the market reaction overnight, stronger-than-expected jobs data, specifically non-farm payrolls, is very important to see how the market will price in the future Fed move,” Uno said. “That will probably boost Treasury yields further from here.”
Traders are now bailing out of wagers on rate cuts for at least the third time in the past 18 months. That’s wrong-footing investors who had overwhelmingly bought bonds to bet that economies would slow down after the past year’s steep increases in cash rates.
“What the last month has shown us is that cash rates need to be closer to 5-6% in most global economies to slow the pace of growth,” said Kellie Wood, a money manager at Schroders Plc. “Until services and the labor market weaken we are likely to see yields push higher.”
On Friday, Australia’s 10-year yield surged to the highest since 2014, while the New Zealand equivalent hit the highest since 2011. Japan’s benchmark government bond yield edged back toward its ceiling of 0.5%. Treasuries extended losses.
“Some of the extreme moves look to be driven by capitulation from overstretched longs,” said Damien McColough, head of fixed-income research at Westpac in Sydney. But it’s hard to see what would spark a turnaround. “It doesn’t feel like a soft payrolls report would stop the rot.”
–With assistance from Neha D’silva.
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