Bonds sell off

At the risk of sounding like a broken record, bond traders continue to fade the hawk—until they don’t.

In the past month, we’ve seen a significant sell-off in U.S. Treasuries. Despite earlier bets on an imminent pivot by the Fed, which would typically push rates and yields lower, traders are now realising that rate cuts will be slower and more calculated. The result? Bonds are selling off as expectations shift.

Why is this happening? Inflation remains above target, the economy is holding firm, and the labour market is still showing resilience. These are not conditions that will push the Fed to cut hard and fast. Slow and methodical (barring any political moves).

Aside from short-term bills and Treasuries, traders are facing losses across the curve as bond prices fall.

Yields have risen by 40 to 50 basis points on everything from 2-year notes to longer-term bonds in the last 30 days alone.

Although for different reasons, the story isn’t much different in Australia in terms of rates remaining higher for longer with any significant cuts likely months, if not longer, away.

Yields on new corporate bond issuance remains strong as businesses still need to compete for funding in an increasingly tight debt market.

At any rate, this sell off is a good reminder to do your own work—and not just assume the bond market is always right. It hasn't been right since COVID.

See you in the market.

Mike