Welcome to the Weekly Fix, the newsletter where capitulation is the watchword. I’m Bloomberg’s chief rates correspondent, Garfield Reynolds.
Yields Spike to 2008 Levels
It was deja vu all over again. The global bond rout accelerated into the end of the week as investors once more bailed on bets that an imminent recession would force central banks to halt interest-rate hikes and pivot toward cuts. Similar dynamics have played out at least three times during the last 18 months or so.
The yield on Bloomberg’s global gauge of government bonds soared to the highest since September 2008, the onset of the global financial crisis. UK traders bet on the highest cash rate in 25 years and a slew of robust US data spurred a sell-off in Treasuries. The US moves in particular look to have been turbocharged by stop-loss action as the overwhelming consensus that yields had peaked was shattered. JPMorgan Chase & Co.’s client survey in late June had shown investors were the most bullish since 2010.
Australia’s central bank may have added to investor complacency when it tried to carry out a ‘hawkish hold’ on Tuesday, a move initially seen as dovish, with yields and the Australian dollar slumping. But the Federal Reserve offered a rapid antidote to any thoughts that pausing means stopping. Minutes from the June meeting revealed there was a strong constituency for a hike that month — and that tightening in July is probably the base case.
Fed Dallas President Lorie Logan said more rate increases will likely be needed. European officials are also biased toward higher rates and are emphasizing the need to keep policy restrictive for longer. Even Singapore’s central bank chief added his voice to the chorus of inflation concerns.
Right now, former Fed official Bill Dudley’s forecast for a 4.5% 10-year US yield is looking more likely than Morgan Stanley’s bullish call for a drop to 3% or less.
The Damage Done
While the renewed wave of hawkishness from central banks is being driven by signs of economic resilience, many still expect the ultimate result will be a harder landing. Allianz’s chief economist Ludovic Subran sees the potential that US or eurozone policymakers overdo tightening as one of the most prominent threats to the global economy. And even amidst the turmoil this week the classic Treasuries curve inverted past a percentage point to test the lows touched in March before the banking crisis hit.
King Street Capital Management, a $23 billion hedge fund with a record of pouncing on high-profile distressed debt events, sees a slow-motion car crash in credit as rising rates and a weakening economy pinch companies laden with debt taken on when borrowing costs were much lower.
Citigroup Inc. analysts meantime warned that measures of corporate leverage are ticking up once again. Credit investors were already starting to turn bearish after corporate notes failed to live up to lofty expectations of double-digit returns so far this year.
China Stimulus Falling Flat
While bond investors in developed markets fret that rate hikes will spur recessions, China’s markets are worried that with the recovery losing steam, authorities haven’t yet announced the sort of stimulus required to turn things around.
The property debt crisis rolled on, as defaulted developer Shimao Group Holdings Ltd. failed to find a buyer for a $1.8 billion project at a forced auction, even at a heavy discount. Sino-Ocean Group Holding Ltd. saw its bonds tumble as the state-backed builder told some creditors it’s working with two major shareholders on its debt.
Meanwhile, Bloomberg News reported that Chinese banks have stopped buying bonds issued in the Shanghai free trade zone after regulators increased scrutiny of the $18 billion market mostly used by the nation’s local government financing vehicles. Banks did move to cut rates for the nation’s $453 billion corporate US dollar deposits though, as authorities intensify measures to shore up the struggling yuan.
