Long-dated bond yields lead global market slide

Global bond markets were sharply weaker on Tuesday as rebounding oil prices boosted inflation expectations, suggesting that a long-running rally is now in danger.

Long-dated debt prices led the drop, pushing yields higher and threatening what has been a popular trade in the wake of the European Central Bank's introduction of a €60 billion-per-month bond-buying programme earlier this year.

"We've been expecting a sell off for a while now," said John Wraith, rates strategist at UBS. "But the scale of it has caught everyone by surprise."

Benchmark oil prices moved above $60 a barrel on Tuesday for the first time this year, painting a picture of rising inflation. Eurozone inflation expected over five years in five years' time is now 1.78 per cent, according to swap markets, the highest level reached this year.

The cumulative effect sent prices tumbling across major government bond markets, pushing up yields to levels not seen since the ECB's quantitative easing rescue plan began earlier this year.

The yield on Germany's 10-year Bund, the benchmark for Europe's debt markets, rose 5 basis points to 0.5 per cent - a sharp turnround from the record low 0.05 per cent last month. The yield on 30 year German Bunds also jumped, rising above 1 per cent from less than 0.5 per cent in April.

The pressure on core eurozone bond markets was also reflected by selling in UK and US bond markets. Benchmark 10-year Treasury yields hit their highest point since early March and 30-year US bond yields rose 5 basis points to 2.87 per cent.

Pain was also felt by investors holding bonds issued by countries in the periphery of Europe, with Spanish 30-year bond yields up 32 basis points on Tuesday, and equivalent Italian and Portuguese bonds rising 28 and 30 bps respectively.

The yield increase came as negotiations in Greece over the country's bailout loans intensified, sending yields up in the Greek bond market and raising concerns about the country's future in the eurozone and the impact that might have on wider markets.

The abrupt reversal in long-dated bonds marks the first challenge for investors who have reaped handsome rewards in recent months, with total returns beating those in other high growth assets.

Investors in 30-year German bonds have now lost about 11 per cent in the space of a fortnight, pointed out Jeff Keen, co-head of fixed income at Waverton, the London-based investment management boutique. "It illustrates that the risk/reward in this market is skewed," he said.

Rabobank noted that the bond market moves on Tuesday coincided with better than expected numbers from ISM non-manufacturing data in the US. However on an ordinary day these figures would cause barely a ripple in global markets, said Mr Wraith at UBS.

"These sorts of moves show how fragile the market is," he said. "Those with long positions in bonds will be holding their breath because once something puts pressure on prices the momentum builds quickly."

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