Global bonds rout put central banks on the spot
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What a crazy market,” said Priya Misra, global head of rates strategy at TD Securities. “The 20s-30s curve is just reflecting the overall flattening theme in the market -- where central banks are forced to respond to inflation, which slows growth significantly.”
Yield-curve flattening has gained momentum across global bond markets this week as traders scrambled to price in more aggressive central-bank actions to fend off inflation. The Bank of Canada surprised investors Wednesday by abruptly ending its bond-buying stimulus program and accelerated the potential timing of future interest rate increases; the Canadian yield curve flattened sharply in response.
While declining oil prices account for some of the pullback in breakevens, “profit-taking after a very strong run over the past several weeks” was also a likely factor, said Michael Pond, head of inflation market strategy at Barclays Capital Inc.
“We might be seeing de-risking ahead of the Fed,” which has been mindful of inflation expectations and doesn’t want to appear to be behind the curve, Pond said.
Yield-curve flattening has gained momentum across global bond markets this week as traders scrambled to price in more aggressive central-bank actions to fend off inflation. The Bank of Canada surprised investors Wednesday by abruptly ending its bond-buying stimulus program and accelerated the potential timing of future interest rate increases; the Canadian yield curve flattened sharply in response.
While declining oil prices account for some of the pullback in breakevens, “profit-taking after a very strong run over the past several weeks” was also a likely factor, said Michael Pond, head of inflation market strategy at Barclays Capital Inc.
“We might be seeing de-risking ahead of the Fed,” which has been mindful of inflation expectations and doesn’t want to appear to be behind the curve, Pond said.
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The short-dated bond moves are also partly down to positioning. Traders caught out by the yield rise had to dump their positions, exacerbating the selloff and making some pricing look far-fetched.Traders now expect the United Kingdom and Canada to raise interest rates by more than 100 basis points over the next 12 months. Even the ultra-dovish European Central Bank is seen hiking twice by October 2022.
"It's typical mid-cycle type of economic conditions, where inflation has gone up a bit, rates have gone up, growth starts to slow, but it's not a recession yet."
And if serious growth concerns do emerge, many remain confident of the central bank "put".
"The real widening (in stocks and corporate spreads) would come on a recession, not so much rates risk, just because we've seen time and time again that if markets begin struggling because of interest rate fears, central banks try to push back dovishly again," Martin of BofA said.
"Expect tantrums in risk if central banks respond to inflation - and tantrums in bonds if they don't," Citi strategist Matt King told clients.
"Investors are just not buying what the ECB is saying," said Marios Hadjikyriacos, a senior investment analyst at brokerage XM.
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