Bonds rise as China heightens fear about growth

(Bloomberg) US Treasury bonds rose on Monday along with other sovereign debt and safe haven markets, as China's efforts to contain outbreaks of covid-19 added to growing investors' concern that the aggressive tightening of the Federal Reserve will hurt growth world economic.

Sharp declines in Treasury yields, which exceeded 10 basis points over five to ten year terms, extend a period of high volatility, as bond investors debate the extent of central bank tightening over the next year. The multi-year highs reached by yields over the past week have prompted calls to buy that quickly faded, as gains were short-lived.

The yield on US 10-year bonds, which peaked close to 2.98% last week, had dropped to 12 basis points to 2.78%. The Japanese yen and the US dollar were leading foreign exchange gains, while the euro plummeted to its lowest level since the start of the pandemic in 2020.

The move towards safe haven assets comes at a time when the coronavirus outbreak in China is worsening, with an increase in cases in Beijing raising fears that an unprecedented closure of the capital will be implemented. This fuels fears of a further slowdown in the world's second economy, just as global central banks accelerate the tightening of their policies.

“Market participants are increasingly concerned about global growth prospects,” said Lee Hardman, an analyst at MUFG. This is due “in part to expectations of increasingly aggressive monetary tightening by the Fed and other large central banks to cushion rising inflation risks, and to further growth shocks in China due to the spread of covid.”

Swaps that refer to the dates of the Fed meetings discount half-point hikes at each of the next three Fed policy meetings, and at least one rate cut in the coming years.

Germany, the European haven, performed the best in the eurozone, with 10-year yields dropping nine basis points to 0.87%, while French debt was trading in line with its peers after President Emmanuel Macron was re-elected for a new term.

Price action in global financial markets looked more like a traditional risk-averse reaction, counteracting a trend in which aggressive aggressive central banks had seen stocks and bonds fall simultaneously. The Japanese yen was the only major currency that rallied against the dollar. The euro fell to 0.8% to US$1,0707, its lowest level since March 2020.

Fed President Jerome Powell said Thursday that an increase of 50 basis points “will be on the table” for its May meeting, adding that demand for workers is “too high.” The minutes of the last Fed meeting suggested that the central bank will also begin to reduce its securities holdings with a monthly cap that is expected to rise to $95 billion.

“As the Fed continues to aggressively raise the official interest rate, it will inevitably weigh on the economy and stocks,” said Hideki Shibata, senior rate and currency strategist at Tokai Tokyo Research Institute Co. in Tokyo. “The resulting risk aversion will cause investors to buy back treasury bonds in the long term.”

Original Note:

Treasures Surge With Global Bonds as China Fans Growth Fears

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.