GLOBAL bond markets are being swept up in a fresh wave of selling as monetary policy normalisation bets deepen everywhere, including in negative-rate bastions Europe and Japan.

       Japan’s five-year yield climbed to zero last Friday for the first time since the country’s central bank introduced negative benchmark rates six years ago.

       German 10-year yields rose above zero this week and then surged Thursday after the European Central Bank signalled a rate hike is possible this year.

       Underscoring the gravity of moves in markets, the world’s enormous pool of negative-yielding debt shrank by a record 20% over the space of a day.

       Sizzling inflation is pushing one central bank after another to scrap the extreme measures they imposed during the Covid-19 pandemic, and as policy makers turn hawkish, they are further fuelling bets in markets.

       “Earlier and faster monetary tightening will constrain economic growth and share markets and result in lots more market volatility as investors try to grapple with how high rates will go,” said Shane Oliver, chief economist at AMP Capital Investors Ltd.

       The shift in the key German yield from negative to around 0.15% is loosening the anchor on yields worldwide. Selling in Treasuries increased as bunds fell, then provided another cue for declines in Asian bonds on Friday.

       The Bank of England raising its overnight rate to 0.5% spurred 10-year gilts to the highest level in three years, adding to the momentum.

       New Zealand 10-year bond yields extended recent gains by six basis points while their Australian counterparts advanced nine basis points after central bank upgraded its inflation and employment outlook in its quarterly Statement on Monetary Policy. The benchmark Treasury yield edged higher to 1.84%.

       As yields climb in Europe and Japan, money flows will likely change, too. Negative rates in these economies have been a driving force in pushing fund managers from Tokyo to Berlin to scour the world for better yields, sending ripples through currency markets as they do.

       The global economy is facing a major challenge as inflation and borrowing costs rise. The International Monetary Fund last month cut its world economic growth forecast for 2022, citing weaker prospects for the United States and China along with persistent price pressures.

       US unemployment and payrolls figures will put the question of American inflation and Federal Reserve (Fed) rate hikes back in the spotlight later Friday.

       With a lengthy window until the next Federal Open Market Committee meeting in March, the Treasuries traders are looking for further signals for how rapidly the central bank will move, both on rates and shrinking its balance sheet.

       “The next couple of months are going to see higher inflation prints that leaves the market dealing with Fed policy uncertainty,” said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc. — Bloomberg