Global bond markets steadied on Friday after a sell-off pushed US Treasury yields to their highest level since 2002, and world stock indices rose as the pressure eased. Options traders are already betting the move in rates is close to its top, while Jefferies points investors toward emerging-market debt as developed-market bonds keep sliding.
Yields on 10-year US Treasuries held flat at 5.24% on Friday after days of heavy selling. Global stocks rose in response: the Stoxx Europe 600 climbed 0.4%, and futures tracking the S&P 500 gained the same amount.
European yields pull back from crisis-era levels
German Bund yields dropped 0.09 percentage points to 3.43% as investors sought safe haven debt. The 10-year French yield eased 0.01 percentage points to 4.91%, having jumped as much as 0.1 percentage points on Thursday after a draft 2027 budget reignited concerns over French public finances. That spread between French and German yields reached 1.5 percentage points, its highest since 2012.
Eurozone inflation complicated the picture, hitting a three-year high of 3.8%, above expectations. Henry Allen, macro strategist at Deutsche Bank, likened Thursday's moves to the euro crisis, pointing to sovereign contagion as a major talking point. Oil prices also fell, with Brent crude down 2.1% at $100.15 a barrel, helping the broader stabilization.
Even so, Grace Tam, deputy chief investment officer for Asia at BNP Paribas Wealth Management, warned of more volatility ahead. According to the Financial Times: "We could see further spikes in yields." That, she said, could tighten financial conditions and pressure equities further.
Options markets flash early signs of a top in rates
Beneath the surface, derivatives traders are positioning for the sell-off to fade. In utility stocks, a trader on Thursday sold 5,000 XLU put contracts for $695,000 and bought an equal number of calls for $400,000, a bet that the rate-sensitive sector stops falling. Separately, at the Chicago Mercantile Exchange, someone bought 100,000 SOFR call-spread contracts worth $4.4 million, wagering short-term rates will reverse.
Jefferies points to emerging-market debt
With developed-market bonds under pressure, Jefferies' Christopher Wood argues local-currency emerging-market debt offers an alternative. He noted that Bloomberg's emerging-market local currency bond index has outperformed its G7 index by 59% since March 2020. Jefferies' own global sovereign debt portfolio, first created in March 2020 when Wood advised selling all G7 bonds, has outperformed the G7 index by 73.5%. His base case is that G7 bonds have entered a structural bear market after a 39-year bull market.
Sources: Financial Times, CNBC, MarketWatch
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