Fed Fallout Triggers Global Yield Spike as Tighter Policy Looms

Bonds tumbled across the world on Thursday after Federal Reserve Chairman Jerome Powell’s latest hawkish pivot, with yields from Wellington to London breaching multi-year highs.

Expectations are growing that the Fed’s stance will spur more rapid tightening from central banks across the world. U.K. two-year yields surged to a decade-high, while New Zealand’s 10-year rate touched the highest in three years. German notes proved more resilient than Treasuries, sending the gap between U.S. two-year yields and equivalent German schatz to the widest since February 2020.

The global bond selloff sets the stage for major central bank meetings next week, the highlights being the European Central Bank, Bank of England and Reserve Bank of Australia. Traders brought forward tightening bets for each of them as Powell’s comments created a global spillover effect.

“As the Fed readies itself to lift rates, probably in March, so the world holds its breath to see if tighter Fed policy produces adverse spillover effects in overseas markets,” said Standard Bank strategist Steven Barrow. “With the market priced for the Fed to push the fed funds rate up to no more than 1.75% by the end of 2024, it seems to us that pricing is far short of where the Fed needs to go.”