Bonds battered by high inflation readings

The worst bond rout in decades shows few signs of abating, threatening further pain for both investors and borrowers. U.S. Treasury yields rose again for the twelfth straight week. The S&P U.S. Treasury Bond Index was down 12.41% year-to-date.

The benchmark 10-year U.S. Treasury yield topped 4.02%, as the probability of a 75 basis-point rate hike in November is now almost fully priced in. Moreover, minutes from the Fed meeting in September showed the policymakers are determined to fight inflation. The median expected year-ahead inflation rate rose to 5.1% in early October, from a one-year low of 4.7% in the prior month, according to the preliminary estimate from the University of Michigan Consumer Survey. This closely watched metric by the Federal Reserve might motivate the policymakers to remain ultra-hawkish.

The 2-year T-note yield climbed to 4.50% from 4.31%. The spread of the 2/10-year benchmark stood at -48 basis points, increasing the likelihood of a deep recession. 

In Europe, the German 10-year yield traded higher (+2.35%, +16 basis points). Similarly, the French OAT yield rose from 2.80% to 2.96%. In the United Kingdom, the Bank of England had announced a temporary and targeted intervention on Wednesday 28 September to “restore market functioning in long-dated government bonds and reduce risks from contagion to credit conditions for households and businesses.” The central bank offered to buy more long-dated government bonds on Monday 10 October and planned to cease all purchases on Friday 14 October. Though the size of its daily operations for the final week was doubled, the U.K. 10-year Gilt yield jumped to 4.39% from 4.24%, a sign there is still potential for more market turmoil as pension funds struggle to adjust to the rapid rise in interest rates and volatility.

All bond classes were hurt again by surging yields. Investment grade corporate bonds extended their losing streak to eleven weeks: -0.97% for the Markit iBoxx Euro Liquid Corporates TR Index (down 15.20% for the year), and -1.47% for the Bloomberg Barclays Global Aggregate Corporate Bond TR Index in USD, bringing its year-to-date performance to -22.20%. 

High-yield bonds followed suit, with the Markit iBoxx EUR Liquid High Yield TR Index down 0.99% (-13.85% YTD) and the Markit iBoxx USD Liquid High Yield Capped TR Index down 0.89% (-12.09% YTD). 

Emerging debt fell 1.76% (-22.14% for the year in local currencies - Bloomberg Barclays Emerging Markets TR Index) amid a stronger dollar. The U.S. Dollar Index, which measures the greenback against a basket of six peers, gained momentum at 113.3 (+0.46%).