Saturday 18 November 2017

Bond yields turn positive as markets price for inflation

Markets swing against sterling
Markets swing against sterling

Marianna Aragao

A sell-off in European government bonds pushed Germany's benchmark 10-year securities to the lowest level since the UK's June 23 Brexit vote - turning the yield on the bonds positive.

Negative yields, a feature of markets where investors push up asset value and drive down returns, have been the bane of European investors - from banks to insurers, pension funds and savers - for the past year.

The latest asset value declines are being spurred by rising investor expectations for inflation to tick higher. Dislocation in the markets as a result of the huge swing in sterling since the June Brexit vote has also intensified investors' focus on negative risks,

Losses in US government bonds or Treasuries in recent days reflect growing confidence that Donald Trump's tilt at the White House has come unbalanced. A Trump presidency is seen as unpredictable by the markets, which buy up low risk Treasuries when his poll numbers rise.

In Europe, the swing against sterling means the country is now seen to be importing inflation. "The ongoing repricing in inflation expectations in the UK and the pressure on gilts (UK government debt) is spilling over to European bonds," said Elia Lattuga, a fixed-income strategist at UniCredit. "The market is increasingly concerned about rising breakevens (the gap between investment returns and inflation), because of what is happening in the UK but also because of the recent trend in oil prices and the expected rise in inflation," she said. (Bloomberg)

Irish Independent

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