CORRECTED-ROI-Fade the Fed, global rates are heading higher: Mike Dolan

By Mike Dolan

LONDON, Dec 11 (Reuters) - Whatever the Federal Reserve does from here - even after cutting rates on Wednesday and signaling one further cut - borrowing costs elsewhere are rising again as the global interest‑rate cycle turns. This shift will likely rein in some of the more optimistic economic and market forecasts for the next 12 months.

No matter what you think is in store in 2026, it probably won't be a year of the bond. And if the rate turnaround is happening without the Fed, it's unlikely to be the year of the dollar either.

Without a lightning-bolt event, global borrowing markets have still become unsettled. Investors increasingly believe that the end of the easing cycle is nigh. As usual, they are now trying to price just when the first rate hike of the next cycle will appear on the horizon.

Just this week, European Central Bank hawks suggested that higher rates are the next likely move. The Reserve Bank of Australia made it crystal clear it's now done with rate cuts. And, only slightly less emphatically, the Bank of Canada and Reserve Bank of New Zealand have sent similar messages. The Bank of Japan, meantime, is now odds-on to lift its main rate again next week.

Even if central banks give next year a skip, bond markets with maturities of two years or more need to start repricing for what comes after.

Just looking at 10-year benchmark government yields, the wheels are already in motion. Japan's is at 18-year highs, Australia's hit a two-year high this week, Canada's has climbed 30 basis points this month and even U.S. Treasuries are at their highest in three months, despite ongoing Fed easing.

"These moves all reflect the reality of rate-cutting cycles approaching their conclusion," said BMO strategist Laurence Mutkin, pointing to the surge in 2-year, 2-year forward yields this month as a "more balanced view of a neutral policy rate."

The German 2-year, 2-year forward rate, for example, has risen as high as 2.61% this week, compared with a current ECB rate of 2%. The Australian version hit 4.5% against current RBA rates of 3.6%.

Pull the lens back and the global picture shows considerable tightening underway. The yield on the widest cache of global sovereign and corporate bonds - the Bloomberg Multiverse index - has risen 25 basis points in six weeks to hit its highest since July. And the global government subset of that has risen as much but to its highest since January.

'END OF CYCLE' PSYCHOSIS?

Why the rush?

To be fair, the timelines on market betting of policy rate moves are relatively restrained. Only a further quarter-point rise in Japan and roughly one first move in both Australia and New Zealand are priced for 2026. No change from ECB and Bank of Canada is still the best guess for next year - while further U.S. and UK cuts remain in view.

In other words, the forward curve looks more like a gentle normalization than a full‑blown hawkish turn.

But the "end of the cycle" psychosis comes at a murky time for bond markets more broadly.

For a start, the steady drumbeat of worry about rising public debt piles has been muffled to some degree as post-pandemic inflation and interest rate spikes subsided again over the past two years. If that's now run its course, the rest of the bond market's shaky fundamentals are once again exposed.

Fiscal stimulus in the U.S., Japan, Germany, China and Canada is set to kick in next year, just as company borrowing for everything from artificial-intelligence investment to a wave of mergers and acquisitions moves up a gear and collides with already expensive corporate credit pricing.

And the nominal size of overall borrowing is rising steadily. Major economies led a renewed borrowing spree that lifted global debt to another record near $346 trillion through the third quarter this year, the Washington-based Institute of International Finance said in its latest Global Debt Monitor.

The global economy is still expanding just about enough to keep a lid on the share of debt to world GDP. While total debt reached a record, it was equivalent to about 310% of global GDP - still well off the nearly 340% hit just after the worldwide pandemic rescues, the IIF report showed.

China and the U.S. again delivered the largest increases in nominal government debt, followed by France, Italy and Brazil, it said.

But non-financial corporate debt too is now approaching $100 trillion, with global household debt hitting $64 trillion.

To be sure, one of the trades of 2025 was to bet on steepening bond yield curves as official interest rates continued to tumble this year even as debt levels swelled. And that strategy played out well for the most part.

But as short rates climb, a so-called "bear flattening" of those curves has taken hold - where yields rise across the curve but more at the short end.

That's a tougher environment for bonds.

It may take another shock or something akin to an AI bubble burst to alter the picture decisively in favor of bonds again.

The opinions expressed here are those of the author, a columnist for Reuters

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