Make no mistake: there is pain in the bond market. Traders are being smacked around and wiped out as record-high bond yields surge ever higher, triggering stop losses and desk closures around the world.
If traders thought they would get a reprieve this week, they were badly mistaken.
That is, in fact, exactly what happened. With a relatively clear calendar of meetings and major data points until next Friday’s US jobs data, the smart money was on markets being calm.
This view was widely expressed via short volatility trades and so-called curve flatteners that make money when long-term rates fall relative to short-term rates.
But a combination of strong US manufacturing data, a weak bond auction and more inflation-fighting rhetoric from the US Federal Reserve nuked those positions.
It sent traders scrambling for cover by dumping bonds, as long-term interest rates increased.
In an extraordinary overnight session, US 10-year bond rates lurched 12 basis points higher and, yet again, the global sell-off dragged Australian 10-year bond yields higher to about 5.4 per cent.
The price action during Thursday’s session was particularly choppy as three-year rates spiked above 15 basis points from 4.95 per cent to 5.1 per cent before the 11.30 AEST jobs data release, which showed a slight increase in the unemployment rate, pushed the rate back down to about 5.05 per cent.
The bloodletting has been most severe in the global hedge fund community.
Large and sudden moves in bond and currency markets are often an indication that macro-focused trading pods – or self-contained hedge fund teams – have lost more than their bosses would allow and have been shut down.
The source of their pain, those in the market say, has emanated from big positions in long-term European bond rates.
Euro-area yields were expected to fall before a widely anticipated European Central Bank interest rate increase two weeks ago that many thought would be accompanied by recognition of growth and energy challenges ahead.
But tough talk from the central bank that inflation would remain high forced an unwinding of that trade and pushed 10-year German bond yields to post-global financial crisis highs.
Source: https://www.afr.com/markets/debt-markets/another-day-another-bond-market-bloodbath-20260924-p61092