BOND YIELD INCHING HIGHER ACROSS GLOBE

The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, topped 3.9%, a level not seen in three months, as investors adjust their portfolios for a higher terminal rate. Recent economic data showed the sharpest increase in producer prices in seven months in January, while another report showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, opening the door to further rate hikes by the Federal Reserve. This slew of data followed a blockbuster retail sales report and a hotter-than-expected CPI reading. Speeches from St. Louis Fed President James Bullard and his Cleveland counterpart also supported the idea that the US central bank will have to continue to raise interest rates to cool the economy. Money markets have now priced at least three more 25 basis point rate hikes this year and see interest rates peaking at 5.5% by July.

The yield on the UK’s 10-year Gilt rose towards 3.6%, hovering around its highest level since January 10th, as strong economic data from the US aided bets that the Federal Reserve will stick to its aggressive tightening path. Data on Thursday showed a higher-than-expected increase in both US producer and core producer prices in January, and a drop in weekly jobless claims. Elsewhere, the Bank of England is seen raising interest rates at a slower pace this year than in 2022, amid signs inflationary pressures have peaked. BoE Chief Economist Huw Pill said on Thursday that continuing to raise rates at the pace and magnitude seen over the past year would eventually imply that monetary policy had cumulatively been tightened too much. The Bank of England raised its benchmark interest rate to 4% this month, its highest level since late 2008, and is expected to raise rates just twice more to peak at 4.5% by June, with a risk that it stops earlier at 4.25%.

The yield on the Japan 10-year JGB consolidated at the Bank of Japan's implicit policy cap of 0.50% as investors assessed whether the institution would maintain its ultra-easy monetary stance when the new governor takes a seat in April. Kazuo Ueda, a well-respected economist is set to take a governor's job after current Deputy Governor Masayoshi Amamiya, the most dovish candidate, declined it. Markets welcomed Ueda's name as he is expected to adopt a more hawkish approach. The BOJ has been spending trillions of yen to preserve the ceiling on the 10-year bond as part of efforts to keep borrowing costs low and stimulate the economy.

Germany's 10-year bond yield crossed 2.5%, moving towards an 11-year high of 2.569% hit on December 30th, as strong US economic data raised the chances of the US Federal Reserve sticking to its monetary tightening path. At the same time, remarks by European Central Bank officials dashed hopes of a quick end to the current tightening cycle. ECB President Lagarde reiterated the central bank would keep raising rates to slow down underlying price pressures, while ECB's Chief Economist Philip Lane and fellow board member Fabio Panetta said the sharp increase in borrowing costs had yet to be fully felt by the economy. The ECB has raised its key rates by 50bps to the highest level since 2008, and signaled another similar hike in March to extend its efforts against soaring inflation in the bloc. Meanwhile, European Commission forecasts showed Eurozone economic growth is likely to be stronger than expected this year while inflation will be lower than in forecasts made towards the end of 2022.

France's 10-year government bond yield rose back to above 2.8%, the highest since January 3rd, as investors bet on prolonged monetary tightening cycles in Europe and the US. The ECB raised interest rates by 50bps at its February meeting, pushing borrowing costs to the highest level since late 2008. The central bank signaled a similar move in March, and markets projected the deposit rate to rise above 3.5% by August 2023. Elsewhere, the US inflation rate slowed at a softer-than-anticipated pace, strengthening expectations for further hike rates from the Fed. Domestically, preliminary estimates showed France's annual inflation rate edged up to 6% in January from 5.9% in December, compared to market forecasts of 6.1%. Meanwhile, the unemployment rate fell unexpectedly to 7.2% in Q4.

The yield on the Indian 10-year government bond rose to 7.36%, the highest in February so far, after inflation in India accelerated more than expected in January while the Reserve Bank of India raised interest rates by the expected 25bps to 6.5% and maintained a hawkish stance leaving the door open for further increases. Market participants had mostly bet on a final borrowing costs hike in the current tightening cycle. The central bank also kept its stance unchanged on the withdrawal of accommodation and said it would allow banks to borrow and lend government bonds to increase liquidity in the market. Early in the month, the government presented its Union Budget for the 2023-24 financial year, setting borrowing at INR 15.43 trillion, below broad estimates of INR 16 trillion.

The yield on China's 10-year government bond fell back to 2.9% in February after approaching 3% in late January as traders monitored the country's reopening. China lifted its borders, moved away from the strict zero-COVID policy, and took measures to support the property sector late last year. The economy is expected to rebound in 2023, although a big boost has yet to materialize. The IMF revised China's growth outlook sharply higher for 2023, to 5.2% from 4.4% in October. Meanwhile, foreigners sold roughly CNY 616 billion worth of bonds in 2022, taking their holdings down to CNY 3.4 trillion, with the trend strengthening this year, according to Reuters. Some foreign investors are preparing for monetary tightening, while others see more RRR cuts from the PBOC in 2023.