Investors around the globe are adjusting to the prospect of an extended period of tight monetary policies.
On a closing basis, the yield on gilts of 10 years rose by 20 basis points on Thursday to 4.56%. This was the biggest daily increase in over a year.
The benchmark German bond increased 12 basis points, to just under 3%. This is a level that has not been reached since 2011. The US equivalent rate climbed to 4.69 percent, its highest level since 2007.
These moves are part of an aggressive repricing which has accelerated in the last month and undermines one the most popular bond trades for the year.
After accumulating long-dated assets to hedge against a sharp economic downturn, traders face a number of potential headwinds. These include surging oil costs that could keep inflation high and reduce their appeal.
Althea Spinozzi is a Saxo Bank strategist and she said that the UK sell-off was a clear indication that policymakers wanted to keep interest rates high for a while.
Markets are also dealing with an increase in bond supply. The central bank in Europe could accelerate the rate at which it is shedding bonds off its balance sheet. Meanwhile, government bond sales will remain high as they finance their spending when the economy begins to slow down.
Even the yields on Japanese government bonds — the last bastion for easy monetary policies among developed markets — have been moving. On Thursday, the yield on Japan’s 20-year Government Bonds rose to its highest level since 2014. Traders were testing the central bank’s capability to keep borrowing rates low.
Money markets in the UK are fully pricing a quarter point hike for the very first time since Bank of England kept policy rates unchanged last week. The money markets have also reduced their bets on the extent of monetary easing in 2020, and no longer fully price a reduction to 5% by 2024. The current rate is 5.25%.
The UK bond’s move was more pronounced due to their recent outperformance. This month, the 10-year gilt yields have risen by less than 20 basis points. This compares with around 50 basis point on both US Treasuries and bunds.
Mark Nash said, “It is a catch-up move with US and Europe,” referring to the move of gilts. “Oil prices have been rising. The UK is heavily indebted overseas and its capital is becoming tighter. “Yields must rise.”