Global Bond Selloff Led by U.K. Hinges on Stimulus Skepticism

  • Ten-year gilt yields increase the most in three weeks
  • Treasuries in midst of longest losing streak since April

The prospect of central bankers unwinding their extraordinary stimulus which has sustained markets since the outbreak of the global crisis in 2007 is playing havoc with sovereign-bond markets from the U.K. to the U.S.

Britain’s securities led the slide. The 10-year gilt yield jumped the most in almost a month amid speculation the pound’s tumble to a three-decade low will fuel faster inflation and dissuade the Bank of England from adding to stimulus by cutting interest rates or boosting asset purchases.

That, plus the prospect of a looser government fiscal policy to mitigate economic risks from Britain’s decision to leave the European Union, are proving toxic for the nation’s bonds, the worst-performers in the developed world over the past month.

Treasuries slid before Friday’s jobs data that may support the case for an interest-rate increase by the Federal Reserve this year. Euro-area bonds pared their advance as ECB Executive Board member Peter Praet spoke of the need to pay attention to adverse effects of low rates.

“There’s the feeling that the powers that be are trying to get their thinking cap on to stimulate growth and inflation but looking for other means to do that,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate- and investment-banking business in London. “If you shift from monetary policy to fiscal policy, that should be negative for gilts. If you are putting more emphasis on fiscal stimulus it is like a double whammy for gilts because that should be positive for economic and growth prospects.”

Complacency Groove?

The outlook for monetary policy is dominating investor sentiment as those who have gotten used to a steady diet of rate cuts and asset purchases in recent years contemplate a world in which the major central banks have drawn closer to exhausting their unconventional monetary tools.

Fed officials this week have reinforced the message that the U.S. economy could withstand another rate increase while ECB President Mario Draghi has in recent weeks been emphasizing the need for governments to do their share to boost growth.

Benchmark 10-year gilt yields rose six basis points, or 0.06 percentage point, to 0.87 percent as of the 5 p.m. London close, the biggest increase since Sept. 9. The 1.5 percent bond due in July 2026 fell 0.54, or 5.40 pounds per 1,000-pound ($1,117) face amount, to 105.895. The yield has jumped from a record-low 0.501 percent on Aug. 15.

Treasury 10-year note yields rose two basis points to 1.73 percent, set for a fifth daily increase in what would be the longest run since April. Germany’s benchmark 10-year bund yield was little changed at minus 0.018 percent, after having moved above zero for the first time since Sept. 21.

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