Prospect of inflation staying higher for longer and poor summer liquidity drives surge in bond yields
email rounding up the latestThe strength of the US economy and the spectre of persistent price pressures have fuelled a big surge in borrowing costs on both sides of the Atlantic as investors rethink the trajectory for global interest rates.close to their highest level since 2007 this week, while equivalent UK gilt yields hit the highest since 2008 and 10-year French government bonds reached levels not seen since 2012.
“The narrative heading into the summer break was centred around the next big move was for lower rates, but markets seem to be caught wrongfooted here,” said Piet Haines Christiansen, director of fixed-income research at Danske Bank.at Pictet Asset Management. “Investors have been selling bonds recently with the view that central banks are not thinking about cuts as the labour market is tight and core inflation is sticky.” were about 4.23 per cent, 0.
As issuance has increased, demand from some foreign investors may be waning. US Treasury data shows that the value of Treasuries owned by Japan and China — the two biggest owners of US debt — fell by 11 per cent and 12 per cent, respectively, over the year to June. “It’s crazy volatile at the moment because liquidity is pretty rubbish,” said Mike Riddell, a bond portfolio manager at Allianz Global Investors. “Most US data has surprised to the upside over the past six weeks and this has had an outsize effect on bond prices.”
It may take “sustained higher 10-year yields to slow the economy and the housing sector in particular to reattain 2 per cent target inflation”, they warned.
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