Global Yields Highest Since June as El-Erian Says Fed Should Act

What's Behind the Recent Selloff in the Bond Market?
  • U.S. rates won’t stay low ‘until end of time’: DZ’s Albrecht
  • Japan long-term yields are highest since March on BOJ outlook

Sovereign-bond yields rose to the highest in almost three months as Mohamed El-Erian said the Federal Reserve should raise interest rates.

The yield on the Bloomberg Barclays Global Aggregate Index climbed to 1.24 percent Tuesday, the highest since June 23. It has risen from a record low of 1.07 percent in July. El-Erian said traders are obsessing over the possibility of a quarter-point Fed move. The reason: they’ve come to bank on monetary policy that delivers returns “where everything goes up,” he told CNBC Tuesday.

“Let’s get it over and done with,” El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist, said in the interview. “We’ve become so sensitive to these tiny moves because we are overdependent on the Fed.” The timing probably won’t alter a “shallow cycle” of increases, he wrote on Twitter.

The U.S. 10-year note yield fell one basis point, or 0.01 percentage point, to 1.72 percent as of 7:01 a.m. in New York. The 1.5 percent security due in August 2026 rose 1/8, or $1.25 per $1,000 face amount, to 98 1/32. The yield jumped six basis points Tuesday.

The Treasury note stayed higher as a Bloomberg Politics poll showed presidential hopeful Donald Trump leading Hillary Clinton by five percentage points in the critical state of Ohio.

Less Chance

There’s a 22 percent chance the Fed will raise rates at its Sept. 20-21 meeting, down from 32 percent at the beginning of last week, according to futures data compiled by Bloomberg. The prospect of a December move fell to 57 percent, from 59 percent.

Fed Chair Janet Yellen said last month that the case for higher rates had strengthened, a view reiterated by Vice Chairman Stanley Fischer, who said action in September was possible. Since then, underwhelming U.S. economic data, and this week’s dovish comments from policy maker Lael Brainard, have seen traders pare bets on an imminent increase.

“The Fed has expressed different views in recent speeches,” said Rene Albrecht, a rates and derivatives analyst at DZ Bank AG in Frankfurt. “The case for a hike in September is confusing the market” but there’s “a theme that rates won’t stay low until the end of time.”

U.S. yields may push higher as the Fed prepares investors for the next rate increase, said Enna Li, a debt investor in Taipei at Mirae Asset Global Investments Co., which oversees $93 billion.

John Beck at Franklin Templeton Investments has a different view. “There are still powerful forces” weighing on global yields such as central-bank asset purchases, London-based Beck said in an interview in Sydney. His company has about $740 billion under management.

BOJ Easing?

The other big central-bank meeting next week is the Bank of Japan’s, and the nation’s longer-term bonds fell as investors weighed whether policy makers will lower rates or boost quantitative easing.

Some BOJ officials still favor stepping up purchases of government bonds if the board decides it needs to expand stimulus, according to people familiar with the discussions. Still, economists surveyed by Bloomberg showed only a slight majority anticipating expanded easing, with a rate cut as the most likely option.

Thirty-year yields jumped as much as nine basis points to 0.608 percent, the highest since March.

“Investors are expecting that the BOJ will adopt a more flexible stance on its bond-buying measures and couple that with an additional cut to the deposit rates,” said Katsutoshi Inadome, a senior bond strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., part of Japan’s largest bank. “Superlong bonds are being sold amid speculation that’s starting to look more of a reality.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE