Daily Brief – Bonds unbound

Bonds unbound

Despite the fixation on fixed income pricing in the market lately, it would be an injustice to not touch on the activity of the bond market in this morning’s briefing. The global bond sell-off, led by US treasuries, is certainly the defining feature moving markets this week. The headline figure being quoted is the US 10-year treasury, a key financial benchmark, which now commands a yield of in excess of 5%. That is the highest level in approximately two-decades and should be treated as a credible signal of financial stress.

The path to get here was simple and defined by two key elements. Firstly, the guidance offered by voting Fed members since the last Reserve meeting has shown markets the central bank is more willing to raise rates than perhaps its chairman led on. Secondly, continuing deteriorations in the supply chain of oil due to ongoing conflict in Iran is pushing inflation expectations higher once again. The US Dollar could not ignore the higher yield story and in more volatile trading yesterday pushed higher leaving virtually every currency behind in its wake.

The Federal Reserve publishes its latest monetary policy decision later this week. This should be viewed as a high-risk event not least because of the prospect of any backlash and commentary from the President should the bank choose to hike rates against the will of the White House. One peripheral story worth noting today is GBPEUR. Both economies are dependent upon the import of energy and their currencies therefore become vulnerable when the prices of energy spike. Since last week GBPEUR has gained circa 0.5% despite the Euro usually prevailing in such times of energy price stress.

Discussion and Analysis by Charles Porter

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