(Bloomberg) -- Bonds slid as the prospect of stimulus in China bolstered risk appetite and as investors assessed the growing risks to the inflation outlook ahead of the Federal Reserve’s rate decision on Wednesday.
Thirty-year Treasury yields breached 2.50% to climb to the highest level since mid-2019, before paring losses. European peers followed suit, with German 10-year yields rising to the highest since 2018.
China issued a strong promise for policies to boost financial markets and stimulate economic growth. Optimism over the war in Ukraine was also bolstered after the Kremlin said a Ukrainian proposal to become a neutral country “could be viewed as a certain kind of compromise.”
Russia’s invasion has sent commodity prices flying, adding to inflation expectations after the U.S. posted the highest consumer-price gains in 40 years last month. That’s whiplashed bond markets, with traders caught between a bid for havens and a selloff in the face of soaring consumer-price growth.
“I think there’s further to go on the rate re-pricing front -- we’re in a new, higher inflationary regime with hawkish central banks everywhere and although there are growth risks, recession risks still aren’t dominant,” said Imogen Bachra, a rates strategist at NatWest Markets Plc.
Ten-year Treasury yields rose as much as six basis points to 2.20% before slipping back to 2.16%. The yield on German 10-year bonds gained as much as seven basis points to 0.40%.
Traders expect the Fed to hike its fund rate by 25 basis points. The focus will also be on how policy makers approach balance sheet reduction and signs of a shift in the path of interest rates going forward.
Last week, the European Central Bank surprised markets when it signaled a faster stimulus exit despite risks to growth stemming from Russia’s invasion of Ukraine.
Read Decision-Day Guide: Fed to Hike and Steepen Its Rate Policy Path
“Especially after ECB, markets realize that central banks are still on the path of tightening policy, even though with a cautious stance,” said Pooja Kumra, a rates strategist at Toronto Dominion Bank.
(Updates pricing, adds quote, ECB context)
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