Selloff in Global Bond Markets

Selloff in Global Bond Markets(Source globalresearch.ca)

Global bond markets experienced a significant selloff last week, sparking fears that something much more serious could be developing. German bonds experienced their worst month since 2013. Yields on the country’s 10-year securities, regarded as the benchmark for European financial markets, rose to their highest levels for six months. In the US, the 10-year treasury bond yield climbed to its highest level since June. (The yield on a bond moves in an inverse relationship to its price.) The biggest selloff and rise in yields was in Britain where the return on a 10-year bond rose to a post-Brexit referendum high. Gilts, as they are called, have recorded their largest loss since the turmoil of the global financial crisis in January 2009.

The yield on these British bonds has risen from an historic low of 0.51 percent in the middle of August to 1.28 percent. This means that an investor who purchased bonds at the end of August has suffered a paper loss of £91,000 on every £1 million outlaid, or just over 9 percent, in the space of less than two months. There are two main reasons for the bond sell-off. The first is the expectation of a December interest rise by the US Federal Reserve, coupled with uncertainty over the future of the European Central Bank’s (ECB) quantitative easing (QE) program of bond purchases. The second is signs that inflation may be moving upward, which tends to depress bond prices. This is because bonds pay a fixed income and rising prices reduce the income stream and lower the value of the principal in real terms in the future. Peter Chatwell, head of rates strategy at Mizuho International in London, told Bloomberg: “The premise of the selloff so far was higher inflation and uncertainty on what the ECB is going to do next and particularly about how the next leg of quantitative easing would look.”

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