Global bonds have been such a battering post in recent months that it may come as a surprise that they are only a fraction away from erasing this year’s loss.
The Bloomberg Global Aggregate Bond Index jumped 1.3% on Tuesday, the biggest one-day gain since March, after weaker-than-expected US inflation data. The gauge, which was down 3.8% on the year less than a month ago amid the highest for a longer story, is now just 0.3% lower for 2023.
The global index, which tracks more than $61 trillion, powered ahead as the U.S. inflation numbers spurred traders to shed bets on further interest rate hikes by the Federal Reserve and boost bets on lower borrowing costs. The soft data added to signs that the steepest tightening cycle in a generation is set to slow economies worldwide and push central banks toward rate cuts in 2024.
“No matter what the Fed says now about keeping rates higher for longer is likely to start a gradual cycle of easing in the first half of 2024,” said Kellie Wood, deputy head of fixed income at Schroders Plc in Sydney. Schroders is long two-year Treasuries and also favors Australian and European rates on a bet that global bond yields have peaked, she said.
Markets now estimate a more than half a percentage point hike in rates through July, roughly double the amount they had forecast at the end of October. The US core consumer price index, which excludes food and energy costs, increased 0.2% in October from September, less than the average forecast of 0.3% in a Bloomberg survey.
US two-year yields slipped 20 basis points on Tuesday after the data was released, while those in Germany fell nine basis points. Australia’s three-year yields slipped 12 basis points when they opened on Wednesday, taking away stronger-than-expected local wage growth numbers.
Some investors remain nervous that the market may be getting ahead of itself by betting on Fed tapering.
Pendal Group recently closed a long position in 10-year Treasuries for a profit after entering it in late October, said Amy Xie Patrick, head of income strategies in Sydney. Fidelity International also cut some of its longer-dated bets, taking off some of its longings on US 30-year bonds.
Investors “should have been in the trade by now, especially since yields hit 5%” and above, said George Efstathopoulos, a fund manager at Fidelity International in Singapore. “We were buyers across the curve, especially the long end. Some of the cuts that are priced in for next year may be a little premature.”
Xie Patrick de Pendal said she was once again “happier hiding in two-year” Treasuries. Schroders also remains long on two-year notes, while maintaining a “modest short” on 30-year bonds amid concern about widening U.S. fiscal deficits, Wood said.
The global rise in bonds is a reversal after yields jumped to the highest in more than a decade last month on concern about economic resilience and a looming flood of supply would overwhelm waning demand. Some of the investors who suffered steep losses earlier in the year are now anticipating their long-held belief that a global recession is coming will come true.
“We have reached ‘top everything’ – because all the factors (fiscal policy, liquidity, Chinese growth, housing, credit and employment) that have contributed to the resilience of the global economy are showing signs of weakness,” Steven Boothe, fund manager. at T. Rowe Price Group Inc., wrote in a research note. “The historic 2022 bond selloff has created a buying opportunity for all types of investors.”