Bond markets all over the world are under pressure

Bond markets all over the world have come under significant pressure in recent weeks.

The election of Donald Trump has brought the bond vigilantes out of the woodwork in the US amid speculation Trump’s policies for trade and fiscal spending are going to bring back inflation to the United States. The rise in US yields, and the strongest US dollar in 14 years, have pulled bond yields around much of the world higher as traders have tried to keep spreads at least somewhat in line.

Then on Wednesday, the Federal Reserve hiked its key interest rate 25 basis points to a range of 0.50% to 0.75% and said that it expects three rate hikes in 2017. And while the Fed has been notably bad at predicting rate hikes, the market must still price in the possibility of a more hawkish Fed.

Selling much of the US complex on Thursday has yields higher by as much as 4 basis points, and up almost 20 bps in some parts of the curve since Wednesday’s Fed decision. Here’s a look at the scoreboard as of 7:26 a.m. ET:

  • 2-year +2.1 bps @ 1.288%
  • 3-year +4.1 bps @ 1.622%
  • 5-year +4.7 bps @ 2.095%
  • 7-year +4.5 bps @ 2.419%
  • 10-year +3.5 bps @ 2.606%
  • 30-year -0.3 bps @ 3.177%

The jump in yields takes the post-election move higher to 90 basis points at the long end, and continues to flatten the curve. The US 30-year yield touched a low near 2.52% on election night. Since then, bear flattening has taken hold as traders have more aggressively sold the front end than the long end. The 5-30-year spread is together by another 4 basis points on Thursday, narrowing to 109 bps, a level last seen in September, after trading at 137 bps the day following the election.

And Thursday’s selling isn’t just contained to the US, bond markets in Asia and Europe are under pressure as well. Overnight, Japan’s 10-year yield climbed 3.2 bps to 8 bps. The Bank of Japan may be forced to fire up the printing press as it recently announced a policy to target a 10-year yield of 0%.

In Europe, the UK 10-year is higher by 12 bps at 1.50% despite the Bank of England holding its key interest rate at 0.25% and suggesting the economy is likely to see a slowdown. Aside from the move in the UK, Germany’s 10-year is up 6.7 bps at 36.2 bps and threatening its highest print since January. Peripheral Europe is under pressure as well with the Greek 10-year up 19 bps at 7.16%.

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