From the US to Germany to Japan, yields that were almost unthinkable at the beginning of 2023 are now within reach. The selloff has been so extreme it’s forced bullish investors to capitulate and Wall Street banks to tear up their forecasts.
At the heart of the selloff were the world’s longest-dated government securities, those most exposed to the ever growing list of headwinds. Oil prices are rising, the US government is piling on more debt and at risk of another shutdown, and tensions with China are on the rise. For anyone who doubted the tough inflation-fighting talk of Jerome Powell and Christine Lagarde against this backdrop, the read-across is not pretty.
Amid the rout, few corners of the market escaped damage. Austria’s century bond, a poster-child for long-dated debt issued during the low-rate era, took a fresh drubbing, falling to 35 cents on the euro.Fed officials mainly stuck to their mantra of higher-for-longer rates. In Europe, ECB President Lagarde is pushing back strongly against the idea of imminent relief.
Exacerbating the bond moves is a rise in the compensation investors demand for holding longer-dated debt. In Europe, that so-called “term premium” could add 50 basis points to 10-year rates, according to Societe Generale. Notable too was a revised forecast from Goldman Sachs strategists, who now see 10-year Treasuries ending the year at 4.30%. While that’s some 40 basis points higher than their previous target, it’s below current levels.
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