Introduction: Bond market slide deepens after strong US data
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Trouble is brewing in the bond markets again, as investors grow more concerned about inflation, and signs that the US economy may be running too hot.
Government borrowing costs jumped yesterday, and are rising again in Asia-Pacific markets this morning, a move that is pulling down share prices.
Yesterday’s trigger was a surprisingly strong survey of US businesses – as we covered yesterday – showing that activity was rising at the fastest pace in five years, amid a surge in costs.
This prompted a sell-off in US government bonds, as traders calculated that this might prompt further rises in US interest rates to cool inflation.
Chris Weston, head of research at brokerage Pepperstone, says:
Investors were also alarmed by a surprisingly weak auction of US five-year bonds last night, which attracted low demand – perhaps a sign that appetite for Treasury bonds is waning…
Cue the sell-off! With bond prices sliding, the yield (or rate of return) on five-year US Treasuries was driven over 5% for the first time since 2007. 10-year US Treasury yields surged over 5%, in their biggest one-day move since Donald Trump’s ‘Liberation Day’ tariff announcement almost 18 months ago.
These moves are rattling the wider global bond market (as US debt is the ‘risk-free’ asset used as a benchmark by global financial markets).
Already today, yields on Japan’s benchmark bonds have hit their highest level in decades.
Ipek Ozkardeskaya, senior analyst at Swissquote, explains why markets were rattled:
The agenda
11am BST: CBI distributive trades survey of UK retailers
8.30am BST: Swiss National Bank’s interest rate decision
1.30pm BST: US jobless claims data
3pm BST: Bank of England’s Clare Lombardelli speech on “Macroeconomic Policy in a Heterogeneous and Imperfectly Rational World”
Bank of England's Lombardelli warns that rates will probably rise unless energy shock fades
Newsflash: A Bank of England deputy governor is warning that interest rates will be raised, if necessary, to combat the risk of persistent inflationary pressures from higher oil prices.
Clare Lombardelli is telling the Sixth Biennial Conference on Macroeconomic Policy in Warsaw that the energy shock due to the conflict in the Middle East is likely to keep pushing UK inflation higher in the coming months.
Lombardelli points out that businesses have proved more resilient to higher energy costs than the Bank expected. But…. the longer energy prices remain high and volatile, the greater the risk for pass-through more widely into domestic wages and prices. she says.
Lombardelli is one of six Bank policymakers who voted to leave interest rates on hold last week, outvoting their three colleagues who voted for a rise in interest rates.
She also warns that other global costs could add to inflation, saying:
The key question is whether “second-round effects” – where high inflation pushes up wages, fuelling inflation – are developing.
Lombardelli says there is “material uncertainty” about the size and duration of the energy shock.
But unless there is also evidence that the economy is weakening, interest rates will probably have to rise, she says:
Britain is at risk of worrying spillover effects from US yields on UK’s cost of borrowing, warns Professor Costas Milas, of the management school at the University of Liverpool.
He tells us:
There is a danger that government bonds go into “a critical chain reaction”, warns analyst Bill Blain in his daily Morning Porridge newsletter.
In that scenario, rising bond yields raise government’s refinancing costs, leading to increasing deficits. That pushes up the refinancing risks and leads to a higher supply of bonds on the market, which pushes up yields further.
Blain adds:
Brent crude trading over $103 a barrel
Bond traders are also alarmed that the oil price remains stubbornly over $100 a barrel.
After dropping below that level on Monday, and again on Tuesday, and Wednesday, Brent crude is now changing hands for $103.26 a barrel.
Derek Halpenny of MUFG bank says;
UK government bond prices are weakening a little in early trading.
This has pushed the yield on 10-year UK gilts up by 2 basis points to 5.34%, towards the 19-year high set last week.
Thirty-year gilt yields are also up 2bps to 5.82%.
Small moves, but not the direction HM Treasury wants to see….
EBRD cuts growth forecast
The US economy may be growing too fast for investors, but it’s a different picture in developing markets.
The European Bank for Reconstruction and Development warned this morning that growth is slowing across a range of emerging market nations.
Across the 41 economies it covers, the EBRD expects growth of 2.5% this year, 0.6 percentage points below its June forecast.
The EBRD says Iraq, Lebanon and Ukraine’s economies are suffering from the effects of war, and that high energy prices, rising borrowing costs, droughts in Europe and the ongoing closure of the Strait of Hormuz are combining to depress economic growth.
UK 'open to smaller fiscal headroom' to reduce need for budget tax hikes
UK government debt was caught up in yesterday’s bond sell-off too, with the yield on 10-year gilts jumping by 10 basis points (0.1 of a percentage point), towards its highest level since the 2007 financial crisis.
Rising gilt yields will eat into the government’s ‘headroom’ to keep within its fiscal rules, as they show the cost of servicing the national debt, and issuing new bonds, has risen.
Rachel Reeves left her successor, John Healey, a buffer of over £23bn to be keeping within the fiscal rules (to have day-to-day spending covered by tax receipts, and for the debt to be falling as a share of the economy).
With government spending running above forecast so far this year, many City economists have already predicted that this headroom has shrunk.
And the Financial Times is reporting this morning that the UK government might accept a smaller fiscal buffer, rather than raise taxes to reinforce the headroom.
They say:
Japan’s government bond yields have climbed to multi-decade highs today, as the sell-off continues.
Bloomberg has the details:
More US interest rate hikes are being priced in
Financial markets are now much more confident that the US Federal Reserve will raise interest rates rates at least one more time this year.
According to CME Fedwatch, there’s now a 55% chance that US rates are half a percentage point higher by the end of December – implying two quarter-point rate rises (or one beefy hike!). That’s on top of the Fed’s hike earlier this month.
Jim Reid, market strategist at Deutsche Bank, says:
Introduction: Bond market slide deepens after strong US data
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Trouble is brewing in the bond markets again, as investors grow more concerned about inflation, and signs that the US economy may be running too hot.
Government borrowing costs jumped yesterday, and are rising again in Asia-Pacific markets this morning, a move that is pulling down share prices.
Yesterday’s trigger was a surprisingly strong survey of US businesses – as we covered yesterday – showing that activity was rising at the fastest pace in five years, amid a surge in costs.
This prompted a sell-off in US government bonds, as traders calculated that this might prompt further rises in US interest rates to cool inflation.
Chris Weston, head of research at brokerage Pepperstone, says:
Investors were also alarmed by a surprisingly weak auction of US five-year bonds last night, which attracted low demand – perhaps a sign that appetite for Treasury bonds is waning…
Cue the sell-off! With bond prices sliding, the yield (or rate of return) on five-year US Treasuries was driven over 5% for the first time since 2007. 10-year US Treasury yields surged over 5%, in their biggest one-day move since Donald Trump’s ‘Liberation Day’ tariff announcement almost 18 months ago.
These moves are rattling the wider global bond market (as US debt is the ‘risk-free’ asset used as a benchmark by global financial markets).
Already today, yields on Japan’s benchmark bonds have hit their highest level in decades.
Ipek Ozkardeskaya, senior analyst at Swissquote, explains why markets were rattled:
The agenda
11am BST: CBI distributive trades survey of UK retailers
8.30am BST: Swiss National Bank’s interest rate decision
1.30pm BST: US jobless claims data
3pm BST: Bank of England’s Clare Lombardelli speech on “Macroeconomic Policy in a Heterogeneous and Imperfectly Rational World”
