Bonds erase YTD losses as US outlook sours

Global bonds have erased their losses for the year as concern the US economic outlook is rapidly worsening spurs demand for fixed-income assets.

Bloomberg’s index of global sovereign and corporate debt has now gained 1% for 2024 after being down as much as 4.6% in the middle of April. The gauge surged 2.3% last week alone. Bond markets took another jump Friday when monthly US payroll data showed hiring slowed and the jobless rate climbed to a three-year high.

Gains in US Treasuries are lifting all boats, with even Japanese government bonds rallying despite the policy divergence between the US and Japan, said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. “Markets have been too complacent of risk assets and the recent data weakness in US jobs is a timely wake-up call.” 

Treasury 10-year yields slid as much as seven basis points in Asia Monday after tumbling 19 basis points in New York following the worse-than-expected US payrolls report. Japan’s 10-year benchmark yield tumbled as much as 17 basis points, while similar-maturity New Zealand yields slipped six basis points. Australia’s cash bond markets are shut for a holiday, but three-year futures surged to the highest since June 2023. 

“Japanese stocks are being taken to the woodshed, absolute chaos there this morning and it’s setting off a renewed bid for global fixed income,” said Prashant Newnaha, a senior rates strategist at TD Securities in Singapore. “Expect plenty of chop, but ultimately this leg lower in US yields has further room to run.”

Traders are boosting bets on Fed policy easing following the recent spate of weak data. US overnight indexed swaps are now pricing in more than 100 basis points of rate cuts by year-end, compared with just two full quarter-point moves being expected a week ago. Economists at Citigroup Inc. and JPMorgan Chase & Co. are both now predicting the Fed will lower its benchmark by a half-point at both its September and November meetings. 

Some in the market see the recent bond market moves as over-extended, and one that may lead to a pullback and further volatility.

Australian bond futures are signaling aggressive easing, although labor market conditions do not suggest the need for “policy easing of that severity,” said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore. “To me, that signals more volatility lies ahead and strategic directional calls on rates markets are going to be more difficult to discern.”