Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
For months there’s been a simple mantra in the bond market: What goes up keeps on going up. Nervous investors have driven sovereign bond prices to a series of record highs, as they have looked for a safe place for their money.
This move has pushed bond yields (the rate of return on the debt) to record lows.
As a result, many European governments have bee able to borrow at negative interest rates, with investors even willing to pay Berlin for the privilege of buying Germany’s 30-year debt.
But nothing last for ever.
And this week, bond prices have started to turn south, pushing bond yields higher.
Overnight, the yields on America’s two-year and 10-year bonds have hit one-month highs, bouncing back from their lowest levels since 2016.
That move means prices are falling, suggesting weaker demand. The move came after a US Treasury auction of three-year bonds proved disappointing.
So what’s going on?
The optimistic view is that investors are growing less nervous, and are churning their money out of bonds into other assets, which might give a better rate of return.
With a no-deal Brexit on 31 October looking unlikely, and fresh US-China trade talks imminent, the global economy could perk up. That would make low-yielding bonds look less attractive.
As Reuters puts it:
Hopes of diminishing U.S.-China tensions and reduced risk of no-deal Brexit have prompted investors to take profit in risk-off trade ahead of key central bank policy meetings.
The pessimistic view is that investors have simply got carried away in recent months and driven bond prices ridiculously high.
Many had been counting on central bankers to launch big new stimulus packages to spur growth. But those hopes may prove misplaced — if European Central Bank (which meets tomorrow) and the US Federal Reserve disappoint investors.
As Ipek Ozkardeskaya, senior market analyst at London Capital Group, explains:
The downside correction in global sovereign markets continue in the final run-up to the ECB and Federal Reserve meetings this week and the next respectively.
Investors are trimming long speculative positions in sovereign bonds, as dovish expectations have certainly gone well ahead of what central banks would deliver at his month’s meetings. As such, the US 10-year yield recovered past the 1.70% mark, and the 10-year bund retreated past -0.55%.
Also coming up today
Troubled retailer Sports Direct is holding its Annual General Meeting. It’s a chance for shareholders to ask pertinent questions such as “What’s gone wrong with the House of Fraser takeover, Mike?”.
Boss Mike Ashley has, alas, banned journalists from attending — but he’s been known to revoke this red card at the last minute, so the hacks might yet squeeze in.
Fashion chain SuperDry is also holding its AGM – the first since founder Julian Dunkerton won his battle to rejoin the board in April (the rest of the board responded by resigning en masse...)
The economic diary is quiet, beyond new US oil inventory data.
- 10.30am BST: Superdry AGM
- 11am BST: Sports Direct AGM
- 3.30pm BST: US weekly oil inventories