CPI print wiped up last of recent gains for global bonds

US inflation data has erased the last remnants of a global bond rally that started in December with the hope that the Federal Reserve had finally pivoted to favor interest-rate cuts.

A Bloomberg index of global debt has dropped 3.5% this year, wiping out all of its gains since Dec. 12, the day before the Fed announcement that month. Slower-than-forecast UK inflation numbers for January offered some relief to Treasuries on Wednesday, lowering the US 10-year yield a couple of basis points to 4.29% following Tuesday’s 14-basis-point surge.

Global bonds slumped this year as Fed Chair Jerome Powell led major peers in pushing back strongly against market bets that central banks would start rapid easing moves as early as March. The rout accelerated after data on Tuesday showed US inflation in January was stronger than expected, while prompting traders to push back bets on the first Fed interest rate cut to July.

“January CPI is a game changer — the narrative that Fed disinflation provided scope for insurance cuts is clearly now on the chopping board,” said Prashant Newnaha, Singapore-based senior rates strategist at TD Securities Inc. “There is now a real risk that price pressures begin to shift higher. The Fed can’t cut into this. This should provide momentum for further bond declines.”

Traders are now only fully pricing in three Fed rate cuts for this year, with around a 70% chance of a fourth reduction. That lines up with the US central bank’s own forecast for three easing moves, though it is a far cry from just a month ago when swaps showed the potential for as many as seven downward shifts in the cash rate. 

The strength of the US economy makes Treasuries unattractive at the moment, despite the fact that rate bets are now better aligned with Fed guidance, according to Amy Xie Patrick, head of income strategies at Pendal Group in Sydney. She has pulled back from US government duration, to focus more on corporate notes for now. 

“Credit is the easier choice because economic momentum is still strong enough to support risky assets,” Xie Patrick said. The structural disinflation story is “a two steps forward, one step back process,” she said.

UK debt jumped and money markets reloaded on Bank of England rate-cut bets after UK price growth missed median estimates. Traders fully priced two quarter-point reductions this year and almost doubled the chances of a third to 80%, while two-year yields fell 9 basis points — the most this year — to 4.06%. German peers were more restrained, dropping 4 basis points.   

Australian 10-year bond yields jumped as much as 12 basis points to 4.29%, right in line with their level before the Fed’s December announcement, while Japan’s counterpart climbed as much as 4 basis points to a two-month high.