The global bond rout returned with a bang, sending 10Y US Treasury yields as much as six basis points higher to 2.53%, the highest level in over two years. The selloff happened as oil prices surged by more than 5% following Saturday's agreement by NOPEC nations agreed to slash production, leading to rising inflation pressures. At last check, the 10Y was trading at 2.505%, up from 2.462% at Friday and on track for its highest close since September 2014, according to Tradeweb.
“There’s been some pretty decent cheapening across global bond markets,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. The spike in oil prices since OPEC announced a cut in output has led to further cheapening, while in Europe “you had the ECB last week, all contributing to the steepening that we’ve seen.”
Japanese bond yields jumped, while Eurozone bonds were weaker across the board, too, with the yield on 10-year German debt up 0.05 percentage point at 0.392%. Germany’s yield curve, as measured by the spread between two- and 30-year bonds reached the steepest since 2014, based on closing prices, while a similar gauge for Japan widened for a fifth day. U.K. 10-year yields climbed three basis points to 1.48 percent, while those on similar-maturity bunds also added four basis points, to 0.40 percent
Even that bastion of negative rates, Switzerland, saw yields spike, fast approaching the psychological 0% barrier.
"It does seem to be oil-driven, but clearly the bearish sentiment around fixed income prevails," Mitul Patel, head of interest rates at Henderson Global Investors, told Reuters.
Another fundamental catalyst behind the bond weakness remains uncertainty over Trump's policies: the rise in oil process adds to a general selloff in government bonds that gathered pace following the election of Donald Trump in November. Investors expect Mr. Trump's policies of cutting taxes and increasing infrastructure spending to lead to higher growth and inflation. Those policies may also encourage the U.S. Federal Reserve to raise interest rates at a faster clip than previously expected, which would likely hit bonds. The Fed is expected to raise interest rates at its meeting this week for the first time in a year.
Treasurys registered their largest five-week gain in yields for six years on Friday after investors sold. The Treasury bond market will face a further test this week with a series of debt auctions. Sales of three-year notes and 10-year notes are scheduled for later Monday, followed by an auction of bonds with 30-year maturities on Tuesday. That will increase the supply of bonds at the end of the year, a period when some investors are reluctant to put money to work and many have grown wary of rising yields.
Adding to the pressure, hedge funds and other large speculators raised bearish bets on 10-year Treasuries to the highest in almost two years last week, more than doubling them to a net 228,604 contracts, according to the latest Commodity Futures Trading Commission data.
Technical analysts believe that a sustained break in Treasury yields above 2.5% would open up an attempt at 3% according to Imre Speizer from Westpac Banking Corp. Forecasters in a Bloomberg survey see German bund yields climbing to 0.6 percent by end-2017. That said, both JPM and Goldman have warned that 10Y yields approaching or rising above 2.75% is where the equity rally will fizzle as tighter financial conditions from rising rates will overcome the favorable equity momentum. That level is now just 25 bps away and may be hit in the coming days.