Financial Times

US bond yields push higher on inflation worries

by Adam Samson and Michael Hunter in London, FT

February 13, 2018 | 1:54 pm
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US bond yields pushed higher on Monday on investor concerns that rising inflation is bringing an era of ultra-loose monetary policy to a close.

The 10-year US Treasury yield crossed 2.9 per cent for the first time since 2014, according to Reuters data, in a sell-off ahead of US inflation figures due on Wednesday which are expected to give the market signals on the outlook for monetary policy.

However, these inflationary concerns were shrugged off by equity investors on Monday with global shares finding support after suffering a steep sell-off last week in wild swings driven by fears of rising bond yields and the unwinding of trades betting on low market volatility.

US stock futures pointed to a strong rebound in opening trade with the S&P 500 up 1.2 per cent, recouping some losses from last week when the benchmark fell 4.4 per cent.

There was a reminder of the extent of the fear seen last week as Bloomberg data revealed a record $23.6bn in net outflows from the world’s largest exchange-traded fund, the SPDR S&P 500, which tracks the US benchmark index.

The Europe-wide Stoxx 600 index regained 1.1 per cent in late morning trade after tumbling 5 per cent last week amid a global tumult that has raised expectations of more turbulent market conditions to come.

London’s FTSE 100 rose 1.2 per cent and Frankfurt’s Xetra Dax 30 was 1.7 per cent stronger. In Asia, the Shanghai Composite rose 0.8 per cent and Seoul’s Kospi was up 0.9 per cent.

Mark Schofield, a senior strategist at Citi, said: “We think it is too early to call an end to the equity bull market.”

“Markets may continue to attach a greater likelihood to tighter policy and pre-emptively adjust. However, a transition to a reflation phase need not be excessively bearish for risk assets.”

Still, bond markets were focusing on the potential impact of higher inflation. The consumer price index is expected to show a pick-up in the pace of price rises, rising 0.3 per cent month-on-month in January, an increase on the previous reading of 0.1 per cent.

The 10-year yield, which moves inversely to prices, rose by as much as 7.8 basis points at 2.9020 per cent, taking it closer to the milestone of 3 per cent, last passed four years ago. It later slipped back from the high to 2.8639 per cent, up 3.3bp on the day.

The more interest-rate sensitive two-year Treasury yield touched a session high of 2.139 per cent, shy of the peaks over 2.1860 per cent it hit during last week’s turmoil. It also came off its day high in the approach to full US trading to 2.0855, up 2.4bp.

“Investors fear a pick-up in inflation may push interest rates even higher, potentially derailing the economic expansion,” said Jeremy Zirin, head of investment strategy for the Americas at UBS.

“The US budget agreement adding $500bn to the deficit over the next two years, a new Federal Reserve chairman in Jay Powell, and the continuation of the Fed reducing its balance sheet further clouds investor perception over the interest rate outlook.”

The world’s biggest hedge fund has warned that markets are entering a new era of volatility as the world adjusts to higher interest rates after a decade of ultra-loose monetary policy.

Bob Prince, co-chief investment officer at Bridgewater, said last week’s market turbulence, which helped trigger record outflows from global stock funds, was set to continue.

“There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days,” said Mr Prince, who runs Bridgewater’s $160bn of investments alongside the fund’s founder Ray Dalio

Brian Levine, co-head of global equities trading at Goldman Sachs, on Friday sent an email to the investment bank’s bigger clients that also warned that the market probably still has not hit its bottom.

“Historically, shocks of this magnitude find their troughs in panicky selling,” he said in the email, seen by the FT. “I’ve been amazed at how little ‘capitulation selling’ we’ve seen on the desk . . . The ‘buy on the dip’ mentality needs to be thoroughly punished before we find the bottom.”

Apart from fears over rising bond yields, complex volatility-linked funds and algorithmic traders have been widely blamed for the wild price swings in equities. Strategists and investors also said a significant portion of the selling could be traced to variable annuities, a popular tax-advantaged insurance-company product that offers customers guaranteed returns.

Aaron Sarfatti, partner at Oliver Wyman, estimated managed volatility funds — also known as “target vol” funds — sold $80bn to $100bn of stock futures in recent days.

“It’s a substantial share of the selling volumes,” he said, adding that the funds’ remit meant they responded quickly to market gyrations. “It’s very common for them to sell within a day of the emergence of elevated volatility.”

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by Adam Samson and Michael Hunter in London, FT

February 13, 2018 | 1:54 pm
12893  |   93   |   0  |   Start Conversation

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