US Treasuries tumble into longest slump since 1984 on hawkish Fed
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US Treasuries have entered the longest sustained slump in 38 years, as policymakers signal their determination to keep raising rates until they are sure inflation is under control.
The yield on benchmark 10-year notes jumped 21 basis points this week to 4.23 per cent on Friday (Oct 21), heading for a 12-week streak of increases that would match the duration of the 1984 episode when then-Federal Reserve chairman Paul Volcker was carrying out a series of rapid interest rate hikes.
The weakness is spreading across global markets, with similar-dated Australian yields climbing to 4.16 per cent, the most since 2014. The Bank of Japan was forced to intervene for a second day Friday to try and hold the 10-year yield at its 0.25 per cent ceiling.
The latest spur for the worldwide selloff came as swaps traders priced in the highest peak yet for the Fed’s policy rate, projecting it topping out at 5 per cent in the first half of 2023. March and May 2023 overnight index swap contracts each exceeded 5 per cent on Thursday in the New York session. Both were below 4.70 per cent as recently as Oct 13 before US consumer inflation exceeded estimates.
“This is a kind of milestone,” former US Treasury Secretary Lawrence Summers said on Twitter. The market-implied terminal rate is “more likely than not to rise more”.
Giving impetus to the selloff, Federal Reserve Bank of Philadelphia president Patrick Harker became the latest central banker to stress rates are going higher. Officials are likely to raise interest rates to “well above” 4 per cent this year and hold them at restrictive levels to combat inflation, Harker said in prepared remarks on Thursday.
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The Fed has hiked its policy rate five times since March and the market is expecting a fourth consecutive three-quarter-point increase at the next meeting in November.
The Bloomberg aggregate bond index has now tumbled 25 per cent from the peak reached in Jan 2021 as the first global bear market in at least a generation shows no signs of waning. BLOOMBERG
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