(Bloomberg) -- Treasuries sold off in Asia as investors responded to global central bankers signaling they will increase interest rates as much as necessary to bring down inflation.
The US two-year yield jumped to the highest level since November 2007 after Federal Reserve Chair Jerome Powell said at Jackson Hole a restrictive stance was likely to remain in place “for some time,” and “the historical record cautions strongly against prematurely loosening policy.” A top European Central Bank official said more tightening is needed even if Europe’s economy tips into recession.
“Even though there was an expectation that Powell would be hawkish, he easily exceeded those expectations,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “I was surprised US rates markets did not move more on Friday night. We retain our view for flatter curves following all the Jackson-Hole communication over the weekend.”
The latest selloff in bonds has more than erased the gains that came in July when investors had begun to take a view that policy makers would slow their pace of tightening to avoid tipping the global economy into a recession.
Inverted Curve
The yield on the US two-year note climbed as much as six basis points to 3.46%, while that on the 10-year security increased five basis points to 3.09%. The inversion of the yield curve, currently at 36 basis points, is still below the peak of 58 basis points reached earlier this month.
Bonds elsewhere in Asia sold off too. Australian 10-year bond yields jumped 12 basis points to 3.69%, and those in New Zealand increased nine basis points to 3.97%
The Fed’s leadership of a global hawkish policy wave is also sending the dollar surging. The Bloomberg Dollar Spot Index jumped 0.5% to approach a record high set in July. The currency’s gains came as swaps traders boosted their expectation for where the Fed rate will be a year from now to 3.82%, from 3.68% a week ago.
Eurodollar traders also trimmed bets on a rate cut in 2023, pricing in a 32 basis-point reduction for next year, versus more than 50 basis-point decline priced in two weeks ago.
“Investors remain concerned about a possible upward revision to the future path of the policy rate in the dots chart at the September Fed meeting,” said Naokazu Koshimizu, a senior rates strategist at Nomura Securities Co. in Tokyo. “The September meeting will give us a clue as to how hawkish the Fed will become, while concern over slowing growth will drive a further inversion of the Treasury yield curve.”
Powell and other top officials from the world’s biggest central banks delivered a clear message at Jackson Hole that they are ready to keep imposing higher rates until inflation substantially moderates, even if that does economic damage.
European Central Bank official Isabel Schnabel said she and her colleagues had “little choice” but to continue tightening even if Europe’s economy enters a recession, which is becoming increasingly likely.
Jackson Hole left traders divided on whether next month’s policy meeting will see the Fed match the past two gatherings with a three-quarter point hike or slow down to a half point move. Still-elevated inflation makes a rate increase inevitable, but the size “will depend on the totality of the incoming data and the evolving outlook,” Powell said.
Friday’s US payroll report -- along with the next consumer-price-index numbers on Sept. 13 -- are among the biggest of the data points that will matter for the Fed, and for global bonds.