Bond yields surge again

The Federal Reserve continued to shrink its massive balance sheet in October (-$119bn) while the FOMC concluded its Nov. 1-2 meeting by raising the federal funds rate by 75 basis points, to a range of 3.75% to 4%, as expected. The terminal rate we discussed last week is now above 5%. Once again, the reason for the Fed’s hawkish tone is inflation. The non-farm payrolls report showed average hourly earnings rose 0.4% in October against a forecast of 0.3%, while the job growth was stronger than expected.

For the week, the yield on the 10-year Treasury gained 15 basis points to 4.16% from 4.01%. The 2-year Treasury yield closed at 4.66%, rising by 25 basis points and exceeding the 10-year note yield by as much as 50 basis points. The difference between the yields on a 10-year and a 2-year Treasury note is often seen as a reliable predictor of US recessions.

In Europe, the German 10-year rose by 20 basis points over the week (2.30%) while the French OAT added 23 basis points (2.83%). The Italy Government Bond underperformed (+31 basis points at 4.46%), increasing its yield premium over German bunds by as much as 11 basis points to 216 basis points. In the UK, the 10-year Gilt yield stabilized around 3.53% (+6 basis points).

Against this backdrop, investment grade corporate bonds slid 0.42% in Europe (Markit iBoxx Euro Liquid Corporates TR Index down 14.15% for the year). The Bloomberg Barclays Global Aggregate Corporate Bond TR Index in USD lost 0.74%, bringing its year-to-date performance to -21.48%. 

High-yield bonds closed higher in Europe, with the Markit iBoxx EUR Liquid High Yield TR Index up 0.54% (-11.92% YTD), but ended lower in the US, with the Markit iBoxx USD Liquid High Yield Capped TR Index down 1.42% (-10.58% YTD). 

Emerging debt in local currencies gained 0.59% (-20.97% YTD) as the U.S. Dollar Index fell below the 111 mark (110.79).