Bonds rally on both sides of Atlantic ahead of US inflation data

Global government bonds rallied ahead of US inflation data on Thursday as traders bet that signs the rapidly recovering US economy is overheating would be outweighed by further reassurance on monetary policy support from the Federal Reserve.

The yield on the 10-year Treasury bond, which moves inversely to its price, dropped 0.05 percentage points to 1.486 per cent as investors bought the debt. This was its lowest in three months, according to Refinitiv data, while European government bond yields also fell significantly.

Economists expect that US consumer prices, excluding volatile food and energy costs, rose 3.5 per cent in May in their biggest year-on-year jump since 1993. Data on Wednesday also showed that Chinese factory gate prices rose at the fastest pace since the financial crisis last month.

Rising inflation prompts fears of higher interest rates that make fixed interest securities such as government bonds less attractive. But the US central bank, which meets next week, has maintained that bouts of higher prices are a transient effect of industries reopening after coronavirus shutdowns.

“Bonds are rallying in anticipation of meetings where the Fed will say something like this again,” said Randeep Somel, portfolio manager at M&G.

Some senior Fed officials, such as vice-chair Randal Quarles, have called for discussions about reducing the central bank’s $120bn of monthly bond purchases that have supported markets through the pandemic. Another, Richard Clarida, has argued that the main US borrowing rate should stay at a record low until the nation reaches maximum employment.

At the European Central Bank’s monthly meeting on Thursday, its president, Christine Lagarde, is also expected to say the bloc still requires supportive monetary policy and that a burst of higher eurozone inflation will not last.

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“While we expect President Lagarde to be cautiously optimistic . . . we also expect her to emphasise that the recent increase in price pressures is likely to be transitory,” Daiwa economist Chris Scicluna said.

The yield on Italy’s 10-year bond fell 0.06 percentage points to 0.81 per cent on Wednesday. Germany’s equivalent Bund yield dropped 0.04 percentage points to minus 0.259 per cent.

The moves came after government bonds were hit hard at the start of 2021 by expectations US president Joe Biden’s multitrillion-dollar stimulus package would cause a long inflationary trend. The 10-year Treasury yield rose from around 0.9 per cent in early January per cent to 1.77 per cent in late March.

“The shorts are now retreating from bond markets,” said Esty Dwek, head of global market strategy at Natixis, referring to trades that sought to profit from the prices of securities falling. “They priced in a lot of growth in inflation very quickly,” she added, “but we will not know if the Fed is right or wrong until closer to the end of the year.”

Stock markets were more subdued on Wednesday. The US S&P 500 index, which has traded in a tight range for weeks after hitting an all-time high last month, was flat in early New York dealings. The Stoxx Europe 600, which inched up to a record high earlier this week, was also trading flat.

The technology-focused Nasdaq Composite rose 0.3 per cent.

In currencies, the euro climbed 0.3 per cent against the dollar, purchasing $1.2204. Sterling was down 0.1 per cent at $1.4136.

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Brent crude, the international oil benchmark, added 0.8 per cent to $72.75 a barrel.



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