Ahead of a crucial Federal Reserve policy meeting, global bond rates have increased to levels last seen in 2009, raising concerns that interest-rate reduction cycles from the US to Australia may soon come to an end.
Money market bets have reinforced the perception that yields on a Bloomberg barometer of long-dated government bonds have returned to 16-year highs.
As they wager on an almost likely boost this month in Japan and two quarter-point increases in Australia next year, traders are now pricing almost no further rate reduction from the European Central Bank.
The situation is changing quickly, even in the US, where the Fed is predicted to lower rates on Wednesday. As investors consider a less optimistic view for monetary policy, inflation, and fiscal restraint, yields on 30-year Treasury bonds have returned to multi-month highs.
Almost a full percentage point above the central bank's target, a measure of prices that the Fed tracks increased to 2.8% in September.
Bonds are being impacted by borrowing to help close a $1.8 trillion budget deficit, and some investors are building a risk premium into the Treasury curve due to concerns about the independence of the next Fed Chairman.
Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, commented, "A 'disappointment trade' is unfolding across several developed markets' as investors come to terms with central bank rate-cutting cycles that may be ending soon." He noted that the Fed's easing cycle may be coming to an end, which presents difficult circumstances for long-term US rates.
The change in the market indicates a growing belief that the cycle of rate cuts, which was started last year to promote growth and has since driven global stocks to all-time highs and increased bond prices, will soon come to an end.
In light of President Donald Trump's trade war and rising government debt from Tokyo to London, bond investors are currently considering the prospects for global growth and analyzing inflation threats.
Bond rates from Germany to Japan have also reached multi-year highs, with longer-dated debt being most affected by the potential for further debt issuance. Japan and the UK are increasing short-term borrowing in response to a shift in investor demand.
Just hours before the Fed meeting, where decision-makers are anticipated to announce a third consecutive decrease, Treasury bonds are under scrutiny.
The uncommon phenomena of yields on 10-year Treasury bonds hanging around their highest levels since September raises questions about the US debt load and potential replacements for Chairman Jerome Powell when his term expires in May.
Kevin Hassett, the director of the White House National Economic Council, has become the front-runner and is generally regarded as an advocate of Trump's desire for lower rates.
TwentyFour Asset Management portfolio manager Gordon Shannon commented, "We've seen the Hassett-trade price in easing monetary policy in recent days with a weaker dollar, steeper yield curve, and rallying risk assets." "But even a Hassett-led Fed may be constrained by persistence in inflation markets are hesitant about how far to push this."
Global bond markets are currently indicating that pressures on borrowing costs will continue. Next week, German lawmakers will approve a record €52 billion ($61 billion) in defense orders, while markets are still processing Japan's largest spending spree since the easing of economic limits.
Sydney's central bank governor, Michele Bullock, has all but ruled out rate cuts, and the sharp change in expectations has caused Australian bond rates to rise to the highest levels in developed markets.
According to Amy Xie Patrick, head of income strategies at money management Pendal Group Ltd., "this yield move is about anticipating stronger growth because the world will probably be fiscally more expansionary next year."
