Fed’s hawkish pivot sends sovereign yields soaring to highs across Asia, Australia, NZ

With growing expectations that the Fed stance will spur rapid tightening from central banks all over, yields rose across regions including in Asia.

File image of the Marriner S. Eccles Federal Reserve building in Washington, DC | Photographer: Samuel Corum | Bloomberg

Bonds tumbled across Asia on Thursday after Federal Reserve Chairman Jerome Powell’s latest hawkish pivot, with Australian and New Zealand benchmark yields spiking to fresh highs.

With growing expectations that the Fed’s stance will spur more rapid tightening from central banks across the world, New Zealand’s 10-year yield touched the highest since November 2018 while its Australian counterpart surged toward the peak of the country’s October bond market meltdown. Yields also moved higher in China, Japan and South Korea.

The sense that bonds globally face further sell-offs after the worst rout since 2005 last year was reinforced by data showing a 31-year-high for New Zealand inflation. The region’s stocks also turned lower, a measure of global cross-asset volatility hit a one-year high and two-year Treasury yields extended their overnight jump during the Asian morning.

“We look to be in for a potentially faster and larger hike cycle than was previously thought,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “Powell made no mention of ‘gradual’ or any other disclaimer. Yields will push higher today and over coming days, with the curve bear flattening.”

Wednesday’s Treasury rout was led by shorter-dated notes, shrinking the gap between yields on these securities and those on longer maturities. Such bear-flattening moves often stoke investor concern that a central bank will end up hiking rates so fast that it hurts rather than controls economic activity. U.S. two-year yields rose another two basis points Thursday to 1.17%, after jumping by the most since March 2020 on Wednesday.

Three-year South Korean yields rose as much a seven basis points to 2.23%, the highest since June 2018, while Japanese yields advanced across the curve, including a 1.5 basis points increase in the 10-year yield targeted by the central bank.

Chinese 10-year sovereign yields extended a gain from the 20-month low touched earlier this week, edging up one basis point to 2.73% Thursday. The yield premium of 10-year notes over the Treasuries narrowed to near the lowest since April 2019.

Australia’s 10-year yield rose as much as 12 basis points to 2.06% while three-year yields surged beyond 1.50% for the first time in almost three years.

Investors are particularly concerned that the Reserve Bank of Australia is well behind the curve in winding back pandemic-era stimulus. Australian consumer prices surprised once more to the upside earlier this week ahead of a pivotal RBA policy meeting on Feb. 1.

The nation’s bond market melted down in late October after a CPI reading came in hot enough to spur speculation the RBA would have to scrap yield-curve control.

The central pulled the plug on that part of its pandemic-era stimulus package and now economists and investors expect the RBA will scrap quantitative easing next Tuesday.

That could set off fresh turmoil given traders are pricing in multiple rate hikes despite Governor Philip Lowe’s previous guidance that an end to QE won’t necessarily mean interest-rate increases are imminent.

Swaps futures show traders are forecasting the RBA will hike in May, despite central bank guidance the cash rate target will stay at a record low until 2023 or later.

Traders for New Zealand are pricing in a percentage point of hikes within six months, with the central bank in Wellington expected to be far more aggressive.—Bloomberg