Inflation’s on Its Way Back After OPEC Curb, Bond Market Signals

  • U.K. 10-year break-even rate rises to highest since July 2015
  • OPEC announcement triggered oil’s biggest jump since April

Bond investors raised their expectations for inflation in the U.S. and U.K. after OPEC’s deal to cut crude output for the first time since 2008 renewed expectations of higher energy costs.

Britain’s 10-year break-even rate, a gauge of expectations for prices over the next decade based on bond yields, climbed to the highest in more than a year after the Organization of Petroleum Exporting Countries said its members reached a preliminary accord to trim production following talks in Algiers. In the U.S., the five-year break-even rate rose to the highest since July before reports on the country’s economic growth and labor market.

Higher oil prices and a subsequent increase in inflation may be a boon for global central banks that have struggled to boost the outlook for price increases through years of easing measures. If that causes them to end stimulus earlier than expected, then faster inflation -- which also erodes the value of fixed payments linked to bonds -- may prove a double blow to debt securities.

“Bond markets generally have opened with higher yields, which tells you that the prospect of higher oil prices is not welcome,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “The curves have steepened, which is a classic reaction to the prospect of potentially higher inflation.”

Britain’s 10-year break-even rate, derived from the yield difference between conventional gilts and those linked to retail-price inflation, climbed to 2.72 percent at 2:13 p.m. London time, the highest since July 2015. The U.S. five-year break-even rate rose to as high as 1.47 percent.

Benchmark German 10-year bund yields rose three basis points, or 0.03 percentage points, to minus 0.11 percent. Yields of similar-maturity Treasury notes increased two basis points to 1.60 percent, adding to a two basis-point move Wednesday, according to Bloomberg Bond Trader data.

Although OPEC won’t decide on targets until a November meeting, the surprise announcement triggered oil’s biggest jump since April on Wednesday.

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