It was the week that bond markets finally seemed to grasp what central bankers have been warning all year: higher interest rates are here to stay.
From the US to Germany to Japan, yields that were almost unthinkable at the beginning of 2023 are now within reach. The selloff has been so extreme it’s forced bullish investors to capitulate and Wall Street banks to tear up their forecasts.
At the heart of the selloff were the world’s longest-dated government securities, those most exposed to the ever growing list of headwinds. Oil prices are rising, the US government is piling on more debt and at risk of another shutdown, and tensions with China are on the rise. For anyone who doubted the tough inflation-fighting talk of Jerome Powell and Christine Lagarde against this backdrop, the read-across is not pretty.
Even a US government shutdown hasn’t spurred a sustained bid for Treasuries, the world’s defacto haven asset. House Republicans on Friday failed to pass a short-term funding bill, making a lengthy federal closure more likely. But in the US at least, that recession never showed up, forcing investors to price out monetary loosening. European economies have proved less resilient, but the ECB — which has a single mandate of price stability — has reiterated time and again that it’s too soon to talk about easing with inflation still well above its 2% target.
“I think we are in the fear stage for Treasuries, and that won’t last,” he said. “In our mind, inflation is settling and growth will slow. We will get there in six months.”
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