Global bond market selloff continues. Interest rates up to fresh multi-year highs. Equity markets unperturbed

Risk appetite is higher, as the market continues to digest the Fed’s hawkish update latest week and Chair Powell’s hawkish speech yesterday. Global rates continue to push higher and equity investors seem to have no fear of that, buying into Powell’s soft-landing scenario. The NZD and AUD have outperformed overnight and JPY is the weakest of the majors.

Global bond markets continue to struggle as investors take note of the hawkish pivot by central banks. Traders are no longer comparing the current cycle to that of the great bond sell-off of 1994, but are having to go deeper in history back to the 1970s and 1980s.

After Fed Chair Powell’s hawkish speech yesterday, where he outlined the possibility of raising rates in 50bps clips and said that the Fed should move expeditiously, Goldman Sachs moved to predict back-to-back 50bps hikes at the Fed’s next two meetings. The market currently prices in about 42bps of hikes at each of the next two meetings, so a high chance of moving in 50bps clips.

St Louis Fed President Bullard, the most hawkish member of the FOMC, outlined his case in a Bloomberg TV interview. He argued for a “faster is better” return to a restrictive policy setting to bring inflation under control, and he would like to see a Fed Funds rates above 3% this year, which would require a series of 50bps increases.

Following the chunky sell-off in global bond markets yesterday, there has been another dose of that, with rates climbing to fresh cycle highs. US Treasuries are currently up 5-8bps across the curve, with the 10-year the worst performing, trading as high as 2.39%. European rates are also higher, with the UK 10-rate up 7bps to 1.70% and French and German 10-year rates up in the order of 3-4bps.

Just three weeks into March the US 2-year rate is already up 74bps for the month while the 10-year rate up 54bps.

The domestic rates market continues to be affected by these global forces. NZGB yields for 2-10 year maturities were up 13-14bps yesterday, with the 10-year rate closing at 3.29%. NZ’s 2-year swap rate rose 13bps to 3.14%, while the 10-year rate rose 10bps to 3.44%. Like the US markets, the NZ OIS market shows a similar chance of 50bps hikes over the next two meetings, with about 42bps worth of hikes for each of the April and May meetings.

Given the further sell-off of bonds, one might have expected equity markets to be struggling, but they continue to perform well since the Fed’s hawkish update last week, betting on the fact that the Fed will be able to achieve the coveted soft-landing. The S&P500 is up over 1% while the Euro Stoxx 600 index closed 0.9% higher. Earlier this week Capital Economics’ Chief Economist published a note that looked at previous tightening cycles in the US, UK and Eurozone since the late 1970s. The conclusion was that of the 16 tightening cycles studied, 13 ended in recession. Soft landings are hard to achieve.

In currency markets, given the positive risk appetite backdrop, the NZD has been the best performing of the majors overnight, up 1% to 0.6955. The AUD is up 0.7% to 0.7450. GBP has also notably outperformed, up 0.7% to 1.3255, ahead of tonight’s Budget update and CPI release. At the other end of the leaderboard, JPY continues to struggle against the backdrop of higher global rates. USD/JPY surged above 120 for the first time since 2016, up over 1% to 120.75. NZD/JPY rose 2%, touching a multi-year high of 84 overnight. Other NZD crosses are all higher.

Oil prices are slightly lower after yesterday’s 7% gain, with reports that EU members can’t agree on a Russian oil embargo, with Germany and Hungary holding out on such an agreement.

On the economic calendar, annual UK CPI inflation data tonight are expected to lift to fresh highs, with the headline rate at 6% and the core rate at 5%. US new home sales and euro area consumer confidence round out the calendar.