Since last Friday, the US Treasury yield, the "pricing anchor" of global assets, has taken the lead in the charge, and the global Treasury market has opened a "great escape" model.
U.S. Treasury yields approach 2%
The U.S. non-farm payrolls report on Friday was unexpectedly strong, with the U.S. adding 467,000 new jobs in January, almost four times the expected 125,000, the highest since October last year, while the January hourly wage data surged 5.7% year-on-year, and the performance of the non-farm payrolls data further increased market expectations that the Fed would aggressively raise interest rates.
In the face of unexpected employment data, the market is buzzing with speculation about the U.S. economy. Traders are betting that the probability of the Fed opening its biggest rate hike in 20 years (50bp) after March has risen to 40%, and Bank of America is even expected to raise interest rates seven times this year.
U.S. Treasuries were then sold off sharply, and yields soared en masse. The two-year Treasury yield rose 11 basis points to 1.3 percent, the highest level since the beginning of 2020. In addition, the five-year Treasury yield rose to 1.783%, the highest since August 2019, and the 10-year Treasury returned to 1.9% to refresh the highest level since December 2019.
Entering the week, US Treasury yields have soared again. On Tuesday, the 10-year Treasury yield rose 4.73 basis points to 1.968% in late trading, hitting its highest level of 1.97% since November 7, 2019, and is only "one step away" from hitting the 2% mark. The indicator yield has now risen for the fourth consecutive trading day, the longest rally since a six-day streak a month ago.
Chart of US 10-year Treasury yields, source: Investing.com
At the same time, the market's bet on the tightening policies of the world's major central banks has also shown a global trend.
The global bond market is on the run
The Bank of England announced another rate hike to 0.5% last week, following raising its benchmark interest rate from 0.1% to 0.25% last December, while embarking on a passive balance sheet reduction and sale of corporate bonds.
The Bank of England's move was very aggressive, raising rates in two consecutive rate meetings since 2004.
Even more rarely, the EcB, which has always been known for its dovishness, has also suddenly turned hawkish.
ECB President Christine Lagarde acknowledged on Thursday that inflation risks tend to rise, and she does not rule out the possibility of raising rates this year. Last month, however, she thought such a move would be highly unlikely.
After the news was released, the market's expectations for the ECB's interest rate hike by the end of the year quickly increased from 12 basis points to 25 basis points.
In just two days on Thursday and Friday, nearly $3 trillion in negative-yielding bonds worldwide returned to the positive range, one of the clearest signs by far of the end of the era of global monetary easing.
In Europe, the size of negative-yielding bonds has fallen by 80% since peaking in December 2020, to a total of $1.9 trillion, the lowest level since September 2015, and in 2014, there were no negative-yielding bonds in Europe. Judging from the German government bond yield curve, the current 5-year government bond yield once returned to the positive range, while more than 5 years have returned to the positive range.
Chart of German 10-year government bond yields, source: Investing.com
While the RBA insists it is unlikely to raise interest rates until 2023, the market does not think so. The RBA is now expected to raise its benchmark rate from a record 0.1% to 1% by the end of the year, so treasury yields are also breaking records.
Former RBA board member John Edwards said the RBA could have raised rates four times later this year to meet market expectations.
For the Bank of Japan, although global inflation is soaring, the level of inflation in Japan is still below the central bank's 2% target, and there is no need to immediately change the direction of policy. However, stimulated by the huge fluctuations in the outside world, market expectations began to change.
With Japan's 10-year bond yield on the verge of breaking through the upper limit that the central bank can tolerate, the BoJ may limit yield growth by buying bonds, which may become the first planned bond purchase by the Bank of Japan in two years.
summary
With the Fed's tightening policy on the agenda, the global central bank has gradually embarked on the road of monetary policy normalization, and the cold winter of the global bond market is coming.
In addition, global liquidity will also be reduced, and global assets will open a new round of bubble squeezing.
On Thursday, the latest inflation data to be released by the United States may be a "hammer" on the bond market. The market expects the U.S. unseasonal CPI to reach 7.3% y/y in January, and the core CPI to reach 5.9%. If the data is strong, the global bond market is likely to usher in a new round of selling. If the 10-year US Treasury yield breaks through 2%, it is likely to continue to strengthen.