GLOBAL BOND MARKETS have declared that the steepest global monetary tightening campaign in a generation has nearly run its course.
In the span of days, traders have dramatically unwound bets on further rate hikes and current pricing shows the US Federal Reserve is likely going to increase rates twice more at most. It’s a similar picture in the UK, where investors are pricing 50 basis points (bps) of tightening over the next four meetings, half of what was baked in last week.
The Reserve Bank of Australia (RBA), meanwhile, is already done hiking, according to pricing, after traders erased bets for two additional increases. Even in Europe, which kicked off its tightening cycle much later than peers, traders have wiped off around 80 bps from terminal-rate wagers, and another half-point hike on Thursday — all but certain last week — is no longer guaranteed.
Many strategists have followed suit, saying that the collapse of Silicon Valley Bank (SVB) has sent such a shockwave through financial markets that it will force the Fed to go easier on its approach, taking pressure off other policy makers to follow suit. Goldman Sachs Group, Inc. now expects the Fed to keep rates on hold at its March 21-22 meeting, while Nomura Securities has gone a step further and forecasts a cut and a halt to bond sales.
“We believe the Fed is near its peak,” said Seyran Naib, a strategist at Skandinaviska Enskilda Banken AB. “When credit conditions and spreads are now tightened, the market does the job for the Fed, reducing the need for further rate hikes.”
To Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney, the fact that two-year yields fell below cash rates is a sign that the hiking cycle will end.
The first US bank failure since 2008 has turbocharged concern that policy makers’ efforts to quash inflation — led by the Fed’s 4.5 percentage points of rate hikes in the space of a year — will tip economies into recession.
US yields climbed on Tuesday, paring some of yesterday’s retreat. On Monday, two-year rates fell by more than half a percentage point in the biggest move since the 1980s.
Money markets see the central bank’s upper bound peaking at 5.15% by May, before coming down to 4.65% by the end of the year, according to swaps tied to policy dates.
Investors risk another painful unwind similar to February’s rout by restoring bets on a rapid pivot from central banks, according to PGIM Fixed Income. The SVB crisis may end up being much like last year’s UK pension rout, which prompted intervention from the Bank of England, but didn’t stop UK policy makers from hiking rates, said Jonathan Butler, co-head of global high yield at the company, which manages $770 billion in assets.
“Markets believe that central banks will pivot before a recession, whereas my view is the central banks will tighten until they’ve got control of inflation,” he said. “Central banks are going to be more hawkish than the market believes.”
Australian three-year yields closed at 3.05%, some 55 bps below the RBA cash-rate target. That’s the widest discount since 2015, when the RBA was busy cutting interest rates.
The European Central Bank (ECB) now stands as the leading hawk among global policy makers, according to swaps traders, who see it raising rates by more than 110 bps by October.
But there too, the path isn’t certain. The ECB’s plans for more big rate hikes are set to meet stronger opposition this week after the collapse of SVB, according to officials with knowledge of the matter. — Bloomberg
