Government bond yields rise as traders react to hawkish signals

Newsletter: Unhedged

A global bond downturn pushed US Treasury yields to their highest level in three months on Monday, as investors reacted to the prospect of tighter monetary policy by dumping US and UK government debt.

The yield on the 10-year US Treasury note, which moves inversely to its price, rose briefly above 1.5 per cent for the first time since late June. By late morning, the yield was up 0.02 percentage points at 1.482 per cent.

The UK’s 10-year gilt yield rose 0.04 percentage points to 0.963 per cent, a level around which it hasn’t traded regularly since May 2019.

The moves continue a bond rout that began last week after relatively hawkish central bank meetings on both sides of the Atlantic.

The US Federal Reserve said that half of its policymakers expected US rates to rise in 2022 after consumer price inflation topped 5 per cent for three consecutive months.

The Bank of England also warned that UK inflation could exceed 4 per cent into next year, signalling it may raise borrowing costs from record lows.

Analysts said the prospect of higher rates, along with persistently high inflation, was fuelling a revival of the widespread bets on higher yields that had been largely squeezed out of markets during a mammoth summer debt rally.

“The reflation trade isn’t dead,” said Peter Chatwell, head of multi-asset strategy at Mizuho. “It looks like this supply shock isn’t as transitory as everyone thought, so if you are a central banker you have to set policy accordingly.”

Stock markets on Wall Street and in Europe wavered, meanwhile, despite an oil price rally lifting energy shares.

The Stoxx Europe 600 traded flat, with a more than 2.5 per cent rise for its energy subsector failing to outweigh losses in technology and healthcare stocks whose valuations can be depressed by expectations of higher interest rates.

Wall Street’s S&P 500 blue-chip share index was down 0.3 per cent, while the technology-heavy Nasdaq Composite fell 0.7 per cent.

The S&P has risen 18 per cent during 2021 while the Stoxx is up 16 per cent. Investors are looking to the end of easy gains, driven by monetary stimulus and a strong US economic recovery from Covid-19, as central banks move to reduce support.

“Central banks are just turning a bit more hawkish,” said Grace Peters, head of investment strategy for Europe at JPMorgan’s private bank.

“But we’re in a market that is battling with itself,” she added, referring to a “buy the dip mentality”, where investors had responded to recent stock market falls by topping up their holdings.

Brent crude added 1.9 per cent to $79.6 a barrel on Monday, its highest level since October 2018. The international oil benchmark has advanced almost 9 per cent this month after producer group Opec forecast that demand for the commodity next year would slightly exceed 2019 levels.

US output has also been curtailed by damage from Hurricane Ida, while a European gas shortage has boosted expectations of rising oil demand.

But the advance in oil prices has inflamed fears of central banks increasing borrowing costs to contain inflation.

With bond markets likely to be more pressured by interest rate and inflation expectations, Peters added, “equities feel like the safer place to be”.

The dollar index, which measures US currency against six others, added 0.1 per cent. Sterling rose 0.2 per cent against the dollar to $1.3712.

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