Bond markets across Australia, Japan, and New Zealand are experiencing declines as investors grapple with the implications of slower interest-rate cuts from the United States, a shift that could disrupt debt positions worldwide. Yields on Australian 10-year notes surged by up to 10 basis points, mirroring Monday’s selloff in U.S. Treasuries. In New Zealand, 10-year yields increased by as much as seven basis points, while Japan’s climbed two basis points to 0.975%, nearing a two-month high.
Central to this global debt selloff is a reevaluation of expectations surrounding Federal Reserve rate cuts, which some investors believe may have been overly optimistic. A strong U.S. economy, increasing probabilities of a Donald Trump election victory, and cautious remarks from Fed officials regarding the pace of monetary easing contribute to an uncertain outlook for bond traders.
“Even in markets where sentiment leans dovish, we’re witnessing yield declines,” remarked Prashant Newnaha, a senior rates strategist at TD Securities in Singapore, citing New Zealand’s bonds as an example. He noted that there’s a possibility the Fed could hold rates steady for up to six months next year, a scenario that has not yet been fully factored into market pricing.
Overnight-indexed swaps now indicate that a 25-basis-point rate cut by the Fed next month is far from guaranteed. Apollo Management is among those predicting that the central bank may opt to keep rates unchanged at its upcoming meeting, while others, such as T. Rowe Price, forecast that U.S. 10-year yields could reach 5% next year due to the risks of milder rate cuts and a strengthening economy.
“Treasuries may face challenges in the coming months, with yields likely to trend upwards as the U.S. economy remains robust and supply concerns intensify,” stated Garfield Reynolds, strategist at Markets Live.
Repricing of rate expectations is occurring elsewhere as well. Swaps suggest that the Reserve Bank of Australia will only reduce its benchmark rate by about 50 basis points by the end of August next year, significantly less than what was anticipated following the September policy meeting. Similarly, traders have shifted their outlook for the next Bank of Japan rate hike to June, compared to the later July timeline projected last month.
In this environment, demand for long-term Japanese 10-year bonds, which carry substantial interest-rate risk, is likely to be limited, according to Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
Despite the current downturn, not all analysts predict a continuation of the selloff. The Federal Reserve and the Reserve Bank of New Zealand are actively engaged in rate-cutting cycles, which could sustain underlying demand for bonds.
“We may see a slight correction from here,” noted Lucinda Haremza, vice president of fixed-income sales at Mizuho Securities in Singapore. She added that there’s a potential for a more significant rally in response to heightened Middle Eastern tensions or if Kamala Harris wins the presidency.
For the moment, concerns surrounding U.S. debt supply, election-related hedging, and the potential for a Republican “red sweep” in the upcoming elections are likely to keep pressure on bond markets.
The BlackRock Investment Institute is among those adopting a cautious stance on shorter-maturity Treasuries. “We do not anticipate the Fed will cut rates as aggressively as the markets expect,” strategists at BlackRock, including Wei Li, wrote in a note. They cautioned that an aging workforce, ongoing budget deficits, and the effects of structural changes such as geopolitical fragmentation are likely to keep inflation and policy rates elevated in the medium term.
Related topics:
