Global bonds fall again amid stubborn inflation outlook

investmentnews.com:

Global bond investors are coming to terms with the likelihood that interest rates are going to stay high for the foreseeable future.

From the US and Germany to Australia and Japan, the past two weeks have been punishing for investors who have clung to hopes for rolling rate cuts this year from the world’s biggest central banks. The reality is, inflation has yet to be fully tamed, and that’s put central banks on guard and left bondholders with losses.  

Global government debt lost about 1.6% between May 16 — around the time when many yields were at their lows of the month before reversing higher — through May 29, according to a Bloomberg Index. The sector is down about 5.2% so far this year, erasing all of the gains from late last year, when optimism over the prospect of imminent worldwide rate cuts was at its peak.

As long as inflation stays sticky, economies remain buoyant and governments keep adding to debt piles, bonds remain vulnerable. Longer-dated debt in particular has been coming under pressure lately, with the US 10-year yield on track for its biggest weekly jump since mid-April.

“This was supposed to be the year of the bond, and it’s proven not to be,” said Ian Pollick, global head of FICC strategy at Canadian Imperial Bank of Commerce. “We are in higher-for-longer right now. So bond markets are trying to recalibrate.”

Once pricing in almost seven quarter-point Federal Reserve rate reductions in 2024, US swaps traders are now barely betting on one reduction, and officials are keeping alive the potential further rate hikes. Even with some central banks already cutting, and others — most notably the European Central Bank — expected to start doing so imminently, economic conditions are such that the pace of