Treasuries Lead Global Bond Selloff Amid Corporate Supply Surge

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(Bloomberg) -- Treasuries slumped as a surge in sales of corporate bonds — a sign of favorable financial conditions — and a global selloff in government bonds ushered in the last month of the year.

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Yields climbed by at least five basis points to the highest levels in about a week. The move accelerated during the US morning — led by long-maturity tenors, which ended about eight basis points higher — after Merck & Co. slated the largest of a slew of corporate bond offerings that totaled $15.8 billion.

In addition to competing with Treasuries for investor cash, robust corporate bond issuance signals favorable financial conditions, arising in part from Federal Reserve interest-rate cuts and gains for US equities. A Goldman Sachs index of US financial conditions “has eased considerably over the year, including by 25 basis points over the past week,” the firm’s economists said in a note.

Meanwhile, high expectations that the Federal Reserve will cut interest rates again next week — over the objection of several policymakers who are concerned that inflation could become entrenched above the central bank’s 2% target — are strengthening the headwinds, said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management.

Long-maturity yields are “driven by inflation expectations,” he said. “Cutting rates while inflation is still above target raises questions.”

Economists at Bank of America resumed forecasting a Fed rate cut on Dec. 10 based on delayed September employment data released Nov. 20 — which included an increase in the unemployment rate to nearly 4.5% — and New York Fed President John Williams’s subsequent endorsement of more easing amid signs of labor-market weakness.

Also Monday, a private-sector gauge of US manufacturing unexpectedly declined, and its employment component slumped, putting the brakes on the Treasury selloff.

Merck’s $8 billion bond offering headlined a slate of eight borrowers, the first ones since activity ground to a halt ahead of last week’s US Thanksgiving holiday. Their combined haul of nearly $16 billion is more than three quarters of the way toward the $20 billion dealers had anticipated for the week. Corporate borrowers raised $1.55 trillion this year through November.

Benchmark Treasury yields have helped make that possible, with the 10-year note dipping below 4% at times during the past two months. It happened most recently last week after Williams said there was scope for the Fed to cut rates further in the near term. Fed policymakers are operating with incomplete information as a result of the six-week US government shutdown that delayed the release of key economic indicators that normally would have been published by now.

Still, traders are assigning an 80% probability to the Fed lowering benchmark rates next week for a third time this year. President Donald Trump, who’s complained all year that Fed Chair Jerome Powell hasn’t cut rates enough, Sunday said he’d chosen a successor for Powell, whose term expires in May. US markets priced in additional rate cuts for 2026 last week when White House National Economic Council Director Kevin Hassett emerged as the frontrunner.

Government bonds globally were already under pressure when the US trading day began as Japan’s 10-year yield jumped to the highest level since 2008 on the prospect of a Bank of Japan interest-rate hike later this month.

Japan’s two-year borrowing costs — among the most sensitive to changes in monetary policy — climbed above 1% for the first time in 17 years. The move was fueled by BOJ Governor Kazuo Ueda talking up the prospects for a rate hike, leading money markets to lift the chance of a move on Dec. 19 to around 80%, from less than 25% a week ago.

Traders in US debt remain sensitive to BOJ policy given its control of the spigot on the flow of Japanese yen liquidity globally. Higher rates in Japan may entice domestic investors to keep more funds in local government bonds, instead of higher-yielding assets overseas such as Treasuries.

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