SYDNEY (BLOOMBERG) - Global bonds added to this year's epic rout as traders brace for the Federal Reserve to raise interest rates at the most aggressive pace since 1982.
The policy sensitive two-year Treasury yield climbed as much as six basis points on Friday (April 22) to 2.74 per cent, the highest since late 2018, after Fed chair Jerome Powell said "it is appropriate in my view to be moving a little more quickly". That shrank the premium 10-year notes offer over two-year securities, sending the yield gap below 20 basis points.
"I think there is something in the idea of front-end loading," Mr Powell said during an International Monetary Fund panel discussion, adding that a half-percentage point hike in May "is on the table".
Most bonds pay a fixed interest rate, making them more attractive to investors when interest 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.
Australian and New Zealand bonds also slid, as the bearish tone in debt markets was reinforced by heightened expectations for interest rate increases by the European Central Bank, which sent euro area debt tumbling. Australian 10-year yields rose seven basis points to 3.15 per cent, while similar-dated New Zealand notes traded five basis points higher at 3.56 per cent.
"Fifty-basis point hikes in May and June are reasonable, while 50 in July will depend on the how the data plays out in the next few months," Mr Ben Jeffery, rates strategist at BMO Capital Markets, said of the Fed's outlook.
Such a set of hikes would represent the sharpest tightening since January 1982, when the Fed raised its benchmark by 3 percentage points in one go. The last half-point increase was in May 2000. In subsequent cycles, the United States central bank raised rates exclusively in quarter-point steps that were clearly telegraphed to the bond market.
With headline and core inflation running at the fastest annual rates since the early 1980s, Mr Powell and other Fed officials have signalled that they are prepared to raise rates in half-point increments if necessary, after the quarter-point hike in March. St Louis Fed president James Bullard even flagged the potential the central bank might have to consider a 0.75-point increase.
All told, the US rates market now expects 2.42 percentage points of additional rate hikes by the Fed's December meeting, a rise of about 30 basis points since the close on Monday. The benchmark rate is currently in a range of 0.25 per cent to 0.5 per cent.
