US growth hopes and oil surge fuel worst bond rout since 1990

Surging oil prices and a commitment by the incoming Trump administration to turbocharge economic growth intensified a sovereign bond rout yesterday that last month left investors nursing their worst losses since 1990.

Bond yields of most developed economies climbed steeply in a sell-off led by Treasuries, as investors grew increasingly anxious that president-elect Donald Trump’s ambition to return the US economy to growth of 3 per cent to 4 per cent would mark the end of a period of declining interest rates.

Yesterday, the 10-year US Treasury yield climbed to 2.49 per cent, the highest since June 2015. Comparative sovereign bonds in the UK, France, Germany, Australia, Italy and Spain rose between 5 basis points and 6bp. Bond prices move inversely to yields. In November, the Bloomberg Barclays Global Aggregate bond index lost $1.7tn, its worst performance since at least 1990.

As Brent crude prices surged above $54 a barrel to a 14-month high following Opec’s pledge of a production cut, concerns over higher inflation added to the flight from sovereign bonds whose record-breaking run in the first half of the year began to falter in July.

On Wall Street, energy stocks and financials extended their recent gains, buoyed by crude’s charge and a higher interest rate environment.

“The sell-off in bonds started well before the US election and reflects three key inflection points: rising global growth expectations, inflation and a shift in emphasis from monetary to ­fiscal policy,” said Richard Turnill, ­global chief investment strategist at BlackRock. “What the US election did was amplify all three.”

Investors were also wary of the prospect of another robust US employment report today, which is expected to offer further evidence that the economy has plenty of momentum even before Mr Trump takes office in January. The US is expected to have created about 180,000 new jobs in November, up from 161,000 in October.

The improved tone of US data comes as Steven Mnuchin, Mr Trump’s nominee as Treasury secretary, this week outlined plans for a significant fiscal boost. Stronger expansion and rising inflation, accompanied by a jump in government borrowing to finance tax cuts and infrastructure spending, have the potential to push US bond yields up even further next year, analysts warn.

US government bonds have been the epicentre of the sell-off but have pushed up benchmark yields in Italy, France and Spain over the past month. Investors in Europe are grappling with a bout of political risk that continues this weekend, as Austrians elect a new president and Italians vote on constitutional reforms that could cost Matteo Renzi, the prime minister, his job if he loses. Next year, France, Germany and the Netherlands all go to the polls.

“Investors are positioned for growth in the US, uncertainty in Europe,” said Mark Tinker at Axa Investment Managers. “Most are hoping for no more shocks to change those positions between now and year end.”

However, some fear that the reverberations of the US reflation trade have been overdone in Europe where growth remains lacklustre. “With the European Central Bank still buying bonds – and possibly extending its purchases – the bond sell-off in Europe should be ­limited, ” said Sam Hill, an economist at RBC Capital Markets.