Bond rout deepens as Fed weighs worst rate hike in 22 years

Bonds fell around the world as investors braced for the biggest US rate hike since 2000 and a wave of policy tightening by other central banks. Dip-buying sent stocks in Europe higher.

The US 10-year yield traded around 3% after hitting the milestone on Monday. Germany’s benchmark rate rose above 1% for the first time since 2015, while the corresponding yield on U.K. bonds climbed above 2%. Australian bonds slid, and the currency jumped, after the nation’s central bank increased borrowing costs by more than many had expected.

Meanwhile, investors betting that global bonds are still expensive took shelter in equities. Europe’s Stoxx 600 benchmark added 0.6%, led by energy and travel. US index futures pared gains to trade little changed amid volatile trading.

Markets are getting whipsawed between concerns around persistent inflationary spirals and risks to global growth from rising yields, China’s Covid lockdowns and Russia’s war in Ukraine. The Federal Reserve’s plans to raise rates and reduce its balance sheet have ended an era of cheap money and forced money managers to reassess valuations.

“The right strategy right now is to position for inflation — a clear and present fact — rather than recession, which is still only a possibility,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note.

Next up is the Federal Reserve on Wednesday. The UK is expected to raise borrowing costs a day later.

Asian equities were whipsawed by big swings in Alibaba Group Holding in Hong Kong on concerns about the status of cofounder Jack Ma. The worries faded and the city’s bourse stabilized as officials rolled back Covid-related curbs.

A gauge of the dollar held around a two-year high, while the pound advanced. The Bank of England this week is expected to raise interest rates to a 13year high and clarify plans for selling its government-bond holdings. Meanwhile, markets are wagering on almost four 25basis-point hikes by the European Central Bank this year.