Global bond drop reverses amid tech selloff, Russia tensions

[LONDON] Global bonds rallied on Friday, with investors seeking havens from a technology stock sell-off and concern over increased US-Russia tension.

Benchmark Treasury yields fell as much as 4 basis points to 1.76 per cent after the tech-heavy Nasdaq 100 Index moved into a correction. But Australian bonds were the runaway leaders, with 10-year benchmark borrowing costs dropping as much as 9 basis points to 1.90 per cent.

German peers slid to a one week low at minus 0.07 per cent just two days after turning positive for the first time since May 2019. European and UK shares followed Asian stocks lower amid the risk-off sentiment, while the yen climbed and the dollar strengthened against some of its major peers.

The pound was among the decliners against the greenback after retail sales plummeted in December as the spread of the Omicron variant kept shoppers at home.

"We see the rally in bonds today as a function of stretched investor positioning and some global risk-off due to continuing US-Russia tensions around Ukraine, and as reflected in sharply weaker equity markets," said Andrew Ticehurst, a rates strategist at Nomura.

Global bonds are on track for their worst January since 2009, as speculation builds that the Federal Reserve could deliver more than a quarter-percentage point rate hike in March and then move to trim its balance sheet.

But risk assets have stumbled too as investors bail out of expensive growth stocks with US benchmarks bearing the brunt of the selloff.

Meanwhile, tensions over Ukraine are ramping up before a meeting scheduled for today in Geneva between the top US diplomat and Russia's foreign minister. President Joe Biden said Russia will "pay a heavy price" if any of its forces move across the border into Ukraine after earlier suggesting Western allies might struggle to react to a small-scale attack.

Nasdaq futures extended declines on Friday, dropping more than 1 per cent after Netflix shares tumbled in after-hours trading on disappointing earnings forecasts.

Still, there were signs in US trading Thursday that some traders were closing bearish option positions on Treasuries to take profit. Activity was elevated in a key put contract that some flagged as a potential trigger for fresh yield surges.

"From here, we look for a consolidation in Treasuries, but with a mild upward bias to yields as expectations for rate hikes and sustained growth remain," wrote OCBC Bank strategists Frances Cheung and Terence Wu in a note Friday.

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