Resurgent inflation fears drive global sell-off in government debt
Government bonds suffered a major sell-off on Tuesday as fears about the potential persistence of inflation continued to build.
Yields on government debt around the world climbed significantly yesterday, signalling a lack of investor appetite for sovereign debt. Yields and prices move inversely.
“It’s all about yields at the moment with some big or landmark moves again yesterday in a period where there continue to be doubts about whether the Fed can cut rates in 2025,” Jim Reid, head of research at Deutsche Bank said.
An auction of 10-year US Treasuries on Tuesday attracted its highest yield since 2007, with yields also increasing on shorter-term debt in the world’s largest economy.
In Europe, the yield on the 10-year German bund rose to 2.48 per cent, on track for its six consecutive weekly rise having hovered around 2.0 per cent in early December.
In the UK, meanwhile, the yield on the 30-year Gilt hit its highest level since 1998 while the yield on the benchmark 10-year Gilt also increased to 4.68 per cent. The yield was last higher in October 2023.
Bond yields rose in response to a couple of economic releases which suggest that inflationary pressures might prove more persistent than investors had feared.
A survey from Institute for Supply Management showed that input prices in the US services sector increased at its fastest pace in over two years.
“The rise in prices paid was broad based and the details did not show any one off factors which could have influenced the data,” Mohit Kumar, an analyst at Jefferies wrote.
Separate data on the US labour market showed that job openings in November were at a six month high, suggesting the world’s largest economy remains strong.
In response investors pared back bets on the number of interest rate cuts expected from the US Federal Reserve this year.
The latest nonfarm jobs report is due on Friday, which will shed further light on momentum in the US economy.
Kumar at Jefferies argued that the sell-off in government debt would be unlikely to continue, particularly if the US labour market weakened presaging faster interest rate cuts.
“We are still in the camp that the current sell-off should not have many legs and see rates as close to their local peaks at current levels,” he said.
However, Kathleen Brooks, research director at XTB, warned that investors would be paying close attention to public finance data.
“Bond vigilantes are not stalking the market yet, but they are watching from the sidelines,” she said.