NEW YORK (Reuters) – A sell-off in Treasuries continued overnight before paring losses, with long-term yields pushed to highs unseen since the global financial crisis.
A growing sense that interest rates in major economies will stay higher for longer to contain inflation, resilient U.S. economic data and a sharp unwinding of traders’ positions for a bond rally were among the drivers for the sharp move lower.
SIN BENG ONG, HEAD OF EM ASIA ECONOMICS RESEARCH, JPMORGAN, SINGAPORE
“We are still likely in the early stages of the repricing of “high for long”. Given that financial conditions transmit with a lag, we are mindful that there could be further volatility ahead.” JP Morgan analyst Sin Beng Ong in a note on the pressure it was putting on emerging Asia markets.
RICHARD MCGUIRE, HEAD OF RATES STRATEGY, RABOBANK, LONDON:
“The markets reflect effectively flying blind because the models don’t work, everybody’s been calling for a recession that just simply refuses to arrive. And then you’ve got the march higher in oil prices, which of course is complicating the picture in terms of the outlook for policy rates. All of that, I think is conspiring to see investors very wary of locking up their money in longer dated government bonds. They’re demanding compensation for that and that is resulting in to search in term premia.”
“Over the longer run… this move itself has the power to sow the seeds of his own downfall. We have been calling for a recession for some time, like everybody, but we’re still sticking to our guns on that front and the backup in long dated yields, paradoxically, only strengthens our confidence there because it will increase resulting in inevitable tightening of financial conditions which will weigh on demand going forward.”
“Equities are clearly having a difficult time now with real yields back up and at some point, should the sell-off in in stocks accelerate, then that has itself the power to focus the market’s mind on one of the ways forward and resulting in rebalancing flow into safe havens and then a reversal of the backup in yields that we’ve seen”
VIKRAM AGGARWAL, SOVEREIGN BOND FUND MANAGER AT JUPITER:
“The consensus view for most of this year has been that we are heading towards an economic recession, both in the U.S. and for markets globally, and that has not materialised.”
“We are very cautious on risky assets at this juncture.”
“At some point this very fast and pronounced monetary policy tightening that we’ve had pretty much in every country around the world is going to have an impact on the underlying economy. In that scenario you want to be cautious and lightly positioned with regard to risky assets.”
JUAN VALENZUELA, FIXED INCOME PORTFOLIO MANAGER, ARTEMIS:
“Right now there is huge momentum behind the sell off because the positioning in the market has been wrong.
“A lot of people bought into the idea that because the Federal Reserve was reaching the peak of rate hikes, it was time to buy government bonds, meaning that the majority of the market has been long. And we are going through a process of reassessment of the rate cuts that were priced, we’re pricing some of them out.”
“The consensus position going into this selloff has been long duration.”
“People have been forced to reduce risk and that essentially means selling.”
“I think that it is technical, it is people feeling too much pain and stopping (out of their) positions, because its an asset class on which they have been wrong.”
“I don’t know if we are at the very end of the shake up or we are 90% there but I think most of the shakeup has already taken place.”
NICK NELSON, HEAD OF EQUITY STRATEGY AT ABSOLUTE STRATEGY RESEARCH, LONDON:
“It is quite a violent move and obviously caught quiet a few people out.”
“We don’t expect it (rise in yields) to continue for too long, especially at this speed.”
“Our view is that the U.S. economy slows into next year… so from that perspective, at some point, we expect it (bond market selloff) to normalise.”
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