Bond sell-off prompts traders to cut rate-hike bets

The bond market is now doing part of the job central banks would otherwise do. Weeks of selling have pushed up borrowing costs worldwide, and traders have responded by cutting back their bets on further policy-rate increases. Swaps across eight major economies now price a combined 539 basis points of rate hikes, according to data compiled by Bloomberg. In September the figure was 717 basis points, the highest since 2022.businesstimes

The average yield on global government bonds has risen above 4%, the highest since 2000. Higher borrowing costs are spreading into mortgages and junk credit, which slows the economy in much the way a central bank rate hike would.businesstimes

Fiscal worries and AI debt

The sell-off shows few signs of easing. Concerns about government spending in the US, Japan and France are leading investors to demand more compensation, and a wave of debt issuance tied to artificial intelligence is soaking up capital. Since the start of the second half, US 10-year Treasury yields have climbed more than 70 basis points. Equivalent yields have risen 31 basis points in Japan, 61 in Germany and 121 in France. Traders have scaled back hike bets most in Australia, followed by the euro area, South Korea and Canada.businesstimes

"The more tightening markets price, the tighter financial conditions become," said Ken Orchard, head of international fixed income at T. Rowe Price T. Rowe Price Group, Inc. ↗ 1.62%. "And the tighter financial conditions become, the less tightening central banks may ultimately need – or be able – to deliver." Barclays ↗ 0.09% strategists wrote that the tightening "should reduce the urgency for the Fed to raise rates."businesstimes

Morgan Stanley chief equity strategist Mike Wilson argues that higher yields may make Federal Reserve Chair Kevin Warsh's job easier. The US 10-year yield is up 120 basis points since February, and Wilson says that could slow the economy enough that the Fed may not need to hike, a prospect that could support stocks.marketwatch

Skeptics and inflation risks

Not everyone agrees. With oil above \$100 a barrel because of Iranian attacks on tankers in the Strait of Hormuz, some say markets are still underpricing the risk of further hikes. A Bloomberg Opinion column argued that market rates are "a poor substitute for tighter monetary policy" and that central bankers risk their credibility if they treat them as an excuse for inaction.bloomberg+1

Policymakers have already started to move. In September, Fed officials voted unanimously for the first rate increase since July 2023, though some favor keeping flexibility for October. The Reserve Bank of India also raised rates for the first time in nearly four years. US Treasury Secretary Scott Bessent said stronger growth and spending restraint will "very quickly" improve the path of US borrowing. Japanese Prime Minister Sanae Takaichi said her government is prepared to review its spending and revenue plans if yields move unexpectedly.businesstimes

These questions will be on the table at the International Monetary Fund's annual meetings, which begin Monday in Bangkok. The US is scheduled to release September consumer price data on Wednesday.businesstimes