Sovereign bonds under pressure as traders prepare for Fed rate rise

Government bonds were under pressure on Wednesday as traders braced for the US Federal Reserve to raise interest rates aggressively and central banks worldwide moved to tighten monetary policy to battle inflation.

Australia’s 10-year bond yield rose more than 0.2 percentage points to as much as 3.57 per cent. The nation’s central bank on Tuesday lifted its main interest rate by a larger than expected 0.25 per cent — its first such move in more than a decade.

Germany’s 10-year Bund yield touched 1.03 per cent in early European trading, before settling back to 0.967 per cent, after European Central Bank policymaker Isabel Schnabel told German publication Handelsblatt that a July rate rise was “possible.”

Bond yields move inversely to their prices and can rise when expectations of higher rates on cash make the instruments’ fixed income payments less appealing.

“Australia started the gun on a week where we have more important central bank meetings,” said Brooks Macdonald chief investment officer Edward Park, referring to the Fed’s impending decision as well as an anticipated Bank of England rate rise on Thursday. “It was a firm reminder that bond markets can be caught off guard.”

The Reserve Bank of India on Wednesday announced a 0.4 percentage point rate rise — the first change in more than two years, sending the nation’s 10-year bond yield 0.25 percentage points higher to 7.4 per cent as the price of the debt fell significantly.

Meanwhile, Italy’s equivalent bond yield added 0.07 percentage points to 2.92 per cent, having touched 2.95 per cent earlier in the session, levels not seen since early 2020, following Schnabel’s remarks.

Later on Wednesday the US central bank is expected to announce its first 0.5 percentage point rate rise since 2000. Futures markets are pricing half-point rises at the Fed’s subsequent meetings in June, July and September.

The annual pace of consumer price inflation in the US hit 8.5 per cent in March, as energy and food costs surged in response to Russia’s invasion of Ukraine. Eurozone inflation is running at a record high of 7.5 per cent.

Analysts expect the Fed to also formalise how it will shrink its $9tn balance sheet, which ballooned during the coronavirus crisis as the central bank bought bonds at unprecedented rates, suppressing debt yields and increasing investors’ appetite for speculative assets. In April, as speculation built about the world’s most influential central bank rapidly reversing its pandemic-era support, Wall Street’s technology-heavy Nasdaq Composite share index dropped 13.3 per cent.

“There are some quite hawkish expectations for the Fed, including concerns in the market that they may open the door to 75 basis point [0.75 per cent] rate rises in the future,” said Cosimo Marasciulo, head of fixed income absolute return at fund manager Amundi.

The yield on the 10-year US Treasury note, a marker used by investors worldwide to value financial assets, traded steadily at 2.96 per cent after topping 3 per cent earlier this week, its highest since late 2018.

In equities, Europe’s regional Stoxx 600 index fell 0.5 per cent after Brussels proposed a ban on Russian oil imports, sending the price of Brent crude 4.1 per cent higher to $109.34 a barrel. London’s FTSE 100 fell 0.4 per cent.

Futures trading implied Wall Street’s S&P 500 would rise 0.4 per cent and the tech-heavy Nasdaq 100 would add 0.3 per cent.

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