Some believe more weakness is in store
Fiscal concerns and worries over a prolonged period of elevated interest rates sent government bonds tumbling in the third quarter, and some investors believe more weakness is in store.
The jump in yields is hurting equities, which are set for their first quarterly drop this year in the U.S. and Europe. With U.S. Treasury yields leading the rise, global currencies are reeling as the U.S. dollar rallies. Similarly, investors have pushed back expectations of European Central Bank rate cuts as policymakers have stuck to their message to keep rates high for longer. Money markets pricing suggests traders see the ECB’s deposit rate is seen at around 3.5% by the end of 2024, up from around 3.25% at end-August.
As a result, “yields will rise until investors believe that longer-dated bonds are compensating them for the supply that we know is coming,” said Mike Riddell, senior portfolio manager at Allianz Global Investors. In Italy, 10-year yields have risen 75 basis points this month, with the debt continuing to sell off sharply on Thursday after Italy’s government hiked its budget deficit targets and cut growth forecasts.In addition to slamming bond investors, the rise in yields has hurt stocks, offering investment competition to equities while also raising the cost of borrowing for corporations and households.
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