Global Rate Hikes Outpace Fed Expectations, Threaten Bond Markets

Global interest rates are climbing faster than expected in countries like Japan, Canada, and the UK, posing a bigger threat to bonds than potential rate hikes from the Federal Reserve.

A recent analysis by Bloomberg shows that two-thirds of the 32 swap markets tracked have priced in rate hikes over the next year. South Korea leads the pack with more than 100 basis points of expected tightening.

The increase in global rates is driven by overlapping pressures from higher oil prices, heavy government spending, and an AI investment boom. Central banks outside the US are facing more aggressive inflation concerns, which could undermine traditional diversification strategies using bonds.

George Efstathopoulos, a portfolio manager at Fidelity International, notes that bonds no longer serve as a reliable cushion for portfolios in times of uncertainty. He has reduced his exposure to government debt and now holds only Treasury inflation-protected securities and Brazilian paper.