Fiscal concerns and worries over a prolonged period of elevated interest rates sent government bonds tumbling in the third quarter, and some investors believe more weakness is in store.
U.S. government bond yields ended September with their biggest quarterly rises in a year, disappointing fund managers who were hoping for relief from the historic losses bonds suffered in 2022, when the U.S. Federal Reserve and other central banks raised interest rates to contain surging inflation.While bond yields – which move inversely to prices – appeared to be topping out earlier this year, renewed hawkishness from central banks has sent them soaring again in recent weeks. In the U.S., for example, benchmark 10-year Treasury yields are now hovering around 16-year highs at 4.57%, with some investors saying they could rise to 5% – a level not seen since 2007. Treasuries are on track to post their third straight annual loss, an event without precedence in U.S. history, according to Bank of America Global Research.
The jump in yields is hurting equities, which notched their first quarterly drop this year in the U.S. and Europe. With U.S. Treasury yields leading the rise, global currencies are reeling as the U.S. dollar rallies.
Monetary policy expectations have been a key driver: the Fed last week surprised investors with their hawkish projections for rates, which show borrowing costs remaining around current levels throughout most of 2024.
Investors have had to readjust swiftly, with traders now betting the Fed’s policy rate, currently at 5.25%-5.50%, will be down to 4.6% by the end of 2024, much higher than the 4.3% they foresaw at the end of August.