Pundits see no let-up in savage US bond sell-off

“The market certainly is oversold at the moment in anticipation of Treasury supplies, in anticipation of higher for longer in terms of the Fed.”

Billionaire investor Ray Dalio also predicted 10-year Treasury yields could test 5 per cent on hotter-than-expected inflation. At the Greenwich Economic Forum on Tuesday, he estimated that rates should be 1.5 percentage points above inflation to balance supply and demand.

Opinions vary

The US 10-year bond rate is an important benchmark because investors compare it to the value of their shares. With the risk-free rate so attractive, it sucks money away from sharemarkets.

What is more, long-dated US Treasury bond rates are closely monitored in the housing market because they are linked to US mortgage rates. But the good news is that higher yields are welcomed by central bankers because they are doing some of their work by raising market borrowing costs.

The US Federal Reserve said last month that it might raise interest rates from its current range of 5.25 per cent to 5.5 per cent as it battles to bring inflation closer to its 2 per cent annual target.

Fed futures pricing is evenly divided between another increase and rates on hold before the start of rate cuts that are expected around mid-2024.

The latest spike in the bond sell-off followed a jump of 9.61 million in US job openings data for August overnight and comes before the key non-farm payrolls data on Friday.

“The jump in job openings suggests the US labour market is easing less rapidly than implied by recent data releases, vindicating the Fed’s recent message that rates will remain higher for longer,” said Rodrigo Catril, a senior FX strategist at National Australia Bank.

Strategists said the US bond sell-off, which has roiled global financial markets, is expected to continue until there are clearer signs the US economy is slowing in response to higher borrowing costs.

‘Hard landing is possible’

Also undermining the appeal of US bonds are worries about a ballooning supply of Treasuries. Earlier this year, the US government boosted the size of its bond sales so drastically that it helped spur Fitch Ratings to cut the US sovereign rating to AA+ from AAA.

Fitch expected the country’s finances to deteriorate over the next three years. And Jamie Dimon, JPMorgan’s chief executive, warned that US borrowing costs could soar to 7 per cent in a worst-case scenario.

The Wall Street kingpin told the media in India that the US economy could have a hard landing and cautioned that interest rates might need to rise to fight inflation. He noted that the rate impact between 5 per cent and 7 per cent would be even more painful for the world’s largest economy than it was going from 3 per cent to 5 per cent.

The last time US bond yields surged to that extent was decades ago.

“The 10-year rate gained 400 basis points in just a couple of years, and you have to go back to the 1980s to get a similar amount over the same period of time,” said Joe Capurso, head of international economics at Commonwealth Bank.

The big question for investors is whether this rally is sustainable.

“It comes down to inflation” said Mr Capurso, who expects the US economy to tip into a mild recession next year. “Do you think inflation is going to be too high for too long? I don’t think so. I think it should correct down.”