Global bond rout accelerates, sparking action from BOJ

SYDNEY • The steepest global bond rout of the modern era was extended yesterday, with Treasuries sliding, a key portion of the US yield curve inverting and the Bank of Japan (BOJ) stepping in to cap the rise in yields there.

Yields on two-year Treasuries climbed as much as 11 basis points to 2.38 per cent to lead increases across the curve, as traders priced in two full percentage points of interest-rate hikes from the US Federal Reserve over the rest of this year.

The gap between five-and 30-year yields inverted for the first time since 2006. The curve is flattening as investors bet the US central bank will tighten policy rapidly enough to risk a sustained slowdown in growth.

Japan's 10-year yields rose to 0.25 per cent, despite the BOJ announcing two unlimited buying operations to keep them below that level - the top of its allowed range.

Investors are dumping bonds on expectations the Fed will lead an aggressive wave of global central bank tightening this year, with the impact of Russia's war in Ukraine expected to drive up inflation from current levels that are already the fastest since the 1980s.

Most bonds pay a fixed interest rate, making them more attractive to investors when rates fall. Conversely, when interest rates rise, bonds are less attractive, causing bond prices to fall.

A bond's yield is based on the bond's coupon payments divided by its market price, so as bond prices fall, bond yields rise.

"Momentum for bonds globally is all one way at the moment, as Treasuries slump on Fed hike expectations," said Mr Damien McColough, head of fixed-income research at Westpac Banking. "Even as moves look stretched, there are few signs of the current trend bottoming out."

Bloomberg's Global Aggregate Bond Index has slumped 7 per cent this year, exceeding the record 5 per cent full-year loss the gauge posted in 1999.

Japan's 10-year yields extended gains even after an announcement from the country's central bank that it would purchase an unlimited amount of benchmark bonds at a fixed rate yesterday, the second such move in less than two months.

That sparked an additional purchase operation announcement from the BOJ, scheduled to take place today.

The yen fell to a fresh six-year low on the news, at one point breaching the 123-per-US-dollar level.

Elsewhere, the allure of China's bonds relative to Treasuries continued to fade. Three-year US Treasury yields extended a rise above their Chinese counterparts yesterday, having climbed above them for the first time since 2009 last week.

Australia's three-year yields jumped as much as 17 basis points to 2.39 per cent, the highest since December 2014, as the nation's debt caught up with last Friday's tumble in Treasuries.

BLOOMBERG