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Global Bonds Extend Rout on Inflation Fear With Fed

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Bond markets tumbled Monday as investors anticipated the inflationary impacts of the war in Ukraine will spur aggressive monetary tightening across the developed world.

The yield on 10-year U.S. Treasuries, German bonds and U.K. gilts all jumped more than 10 basis points. Five-year Treasury yields topped 2% for the first time since May 2019, as traders braced for the Federal Reserve to kick off a tightening cycle on Wednesday.

The selloff drove the German 10-year yield to the highest level since 2018, with the move picking up amid concern a fresh round of restrictions to curb the spread of Covid-19 in China could exacerbate global supply bottlenecks.

It’s a sharp turnaround in positioning. Bonds had initially rallied in the wake of Russia’s invasion of Ukraine as investors piled into haven assets. But with inflationary pressures building and the prospect of monetary tightening drawing closer the allure of holding government debt is fading.

“As the inflation outlook is being dominated by geopolitical factors and, most recently, the lockdown in Shenzhen, it seems likely that the repricing higher of inflation has further to go,” said Peter Chatwell, multi-asset strategist at Mizuho International Plc. “This may be particularly disruptive for rates markets.”

The Fed and the Bank of England are both Morninexpected to hike rates this week. The European Central Bank sent government bonds reeling last week after policy makers unexpectedly signaled an accelerated exit from monetary stimulus in response to price growth.

Ten-year Treasury yields broke a previous February high to reach 2.10%, the most since 2019. The 10-year U.S. breakeven rate — a bond-market gauge of inflation expectations — rose above 3% for the first time on record in data going back to 1998.

Swaps traders are certain the Fed will raise interest rates by 25 basis points this week and see better than an 80% chance that it hikes borrowing costs at each of the six subsequent meetings scheduled this year.

“Yields are reflecting a surprise higher shift upward in inflation expectations,” said Jim Caron, senior portfolio manager and chief strategist of global fixed income at Morgan Stanley Investment Management. “Many thought inflation would peak in the first quarter and fall. Now, with oil prices, inflation may stay high.”