Global government bonds drop as traders prepare for Fed rate rise

Global government bonds fell on Wednesday, with debt markets from Australia to the eurozone sustaining intense selling, as traders braced for the US central bank to begin an aggressive series of interest rate rises.

The yield on Australia’s 10-year bond rose as much as 0.18 percentage points to 3.57 per cent during European morning trading, its highest since 2014, while the more policy-sensitive two-year bond yield also added 0.18 percentage points to 2.9 per cent, according to Bloomberg data. The moves came after Australia’s central bank on Tuesday raised rates for the first time in more than a decade by a greater than expected 0.25 percentage points.

The Reserve Bank of Australia kicked off a big week for central bank decisions, with the Federal Reserve expected to announce its first 0.5 percentage point rate rise since 2000 at the end of its two-day policy meeting on Wednesday. Futures markets are pricing three further half-point rises at the central bank’s meetings in June, July and September, as it moves to combat surging inflation.

The yield on the 10-year Treasury note, a key economic benchmark that banks and investors use to price loans and value other financial assets, rose 0.01 percentage points to just under 3 per cent, remaining around its highest level since late 2018.

“We think the FOMC [Federal Open Market Committee]will deliver a well-telegraphed 50bp [basis point] rate hike,” strategists at ING said. “With a 75bp move . . . not completely off the table but unlikely at this stage.”

Bond yields rise when their prices fall, with rate increase expectations lessening the appeal of fixed income payments compared with cash in the bank.

Government debt markets have come under pressure as central banks row back pandemic-era policies that suppressed borrowing costs during the crisis.

In Europe, the 10-year German Bund yield — a benchmark for borrowing costs in the bloc, which started the year below zero — added 0.07 percentage points to 1.03 per cent on Wednesday. Italian and Spanish debt sold off heavily, with the yield on Italy’s 10-year bond jumping by 0.08 percentage points on Wednesday morning to 2.93 per cent, its highest since the market ructions of early 2020.

The European Central Bank could implement the euro area’s first rate rise since 2011 in July this year, the central bank’s executive board member Isabel Schnabel said in an interview with German publication Handelsblatt.

“From today’s perspective, a rate increase in July is possible in my view,” Schnabel said.

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, which has prompted sanctions on Russian oil and disrupted supplies of wheat and grains. Eurozone inflation is running at a record high of 7.5 per cent.

Speaking to Handelsblatt, Schnabel also said that the ECB would be able “to end net purchases” under the central bank’s programme of buying member states’ debt “by the end of June”.

In equity markets on Wednesday, Europe’s regional Stoxx 600 index rose 0.1 per cent. London’s FTSE 100 slipped 0.1 per cent lower.

Hong Kong’s Hang Seng index fell 1.2 per cent as traders positioned for tighter monetary policy in the US, where a stronger dollar has created higher funding costs for emerging market businesses that borrow in the reserve currency.

The dollar index, which measures the US currency against six others, traded at 103.5 points, close to a two-decade high.