US Treasury bond sell-off affects global financial markets

The sell-off in US Treasury bonds is having a significant impact on global markets, from gold to currencies, as investors worry that volatility will increase ahead of the US presidential election early next month...

As bond prices fell, US Treasury yields rose sharply this October.

According to the Financial Times, US Treasury bond prices are on track to complete one of the strongest monthly increases in recent years. Since the beginning of the month, the yield on the 10-year US Treasury bond has increased by about 0.4%, to more than 4.27% in the trading session on October 28.

WHY ARE THE YIELD RISE?

The reason behind this fluctuation in yields is that positive US economic data has forced the market to change its bets on the Federal Reserve's interest rate path, combined with increasing investor confidence that former President Donald Trump will be re-elected.

Fed interest rate expectations are shifting towards the Fed cutting interest rates at a slower pace. After the Fed cut interest rates by 0.5 percentage points at its September meeting, investors were sure that the Fed would cut interest rates two more times in the remaining time of this year, each time by at least 0.25 percentage points. But now, the market has given up on expectations of a repeat of the 0.5 percentage point cut. In fact, for the Fed's December meeting, the possibility of the Fed keeping interest rates unchanged is 26% - according to data from the FedWatch Tool of the CME exchange.

The market believes that the US economy maintains a good growth rate, so the Fed will avoid cutting interest rates quickly, because reducing interest rates too quickly while economic growth is still strong can ruin the results of the fight against inflation. In addition, if there is a “red wave” in the November 5 US election – a scenario in which Mr Trump’s Republican Party takes control of both houses of Congress – US economic policies over the next four years will have a large inflationary effect. That would lead to higher interest rates in the US.

Mike Cudzil, portfolio manager at Pimco, said investors are “taking the enthusiasm out of it” after the Fed’s first rate cut. “It’s a pattern that has been going on in the market for the last 18 months. The market has an expectation for something, then it overreacts to that expectation and it drives asset prices up or down,” he said.

Rob Burrows, a government bond fund manager at M&G Investments, said many of the bets on Fed dovishness had been driven by “fear of missing out on a rate-cutting cycle,” as many investors grew accustomed to the era of low rates after the global financial crisis.

But then came unexpectedly better-than-expected US jobs data, which led investors to assume the Fed would have to slow its rate-cutting pace. “The market started to get nervous. Sometimes it’s a narrow window and everyone is trying to get out,” Burrows said, comparing it to investors selling off US Treasuries due to changing interest-rate expectations.

But the volatility has been far from confined to the US Treasury market. One notable impact has been on the currency markets, with the dollar on track for its strongest month against a basket of currencies in two years, with the Dollar Index up more than 3% in October. The greenback’s rally has pushed the Japanese yen below 150 yen to the dollar, prompting speculation that Japanese authorities may have to intervene in the currency market. The Mexican peso, a victim of Trump’s threats to impose tariffs on imported cars, has also fallen sharply.

INCREASED UNCERTAINTY AND VOLATILITY

Mark Cabana, head of US interest rate strategy at Bank of America, said recent US economic data had “drenched expectations” of a half-point rate cut by the Fed in one fell swoop, forcing markets to discount the risk of a US recession.

“Uncertainty is coming from a number of sources — fundamentals, Fed policy, and the political environment that could lead to more changes in fiscal policy,” Akshay Singal, global head of short-term rates trading at Citigroup, told the Financial Times. He added that the Fed’s path to rate cuts was “much wider than it has been in the past,” but there were two possible scenarios for 2025: no rate cuts at all, or a total of 1.25 percentage points or more.

Some investors have attributed the increased volatility and uncertainty to the market paying more attention to jobs data after inflation began to fall. Unexpectedly weak jobs data in July set the stage for the Fed’s decision to cut rates by half a percentage point in September. But the following month, the jobs report beat expectations.

For global bond markets, “volatility will remain elevated in the short to medium term” as markets await the US election and key central bank policy decisions, said William Vaughan, deputy portfolio manager at Brandywine Global Investment Management. In addition, expectations for Trump’s