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September 5, 2013 7:33 pm
Government borrowing costs in the US and Europe surged as investors became more optimistic that the developed world has embarked on a period of sustained and rapid growth and anticipated that central banks will increase interest rates earlier than previously thought.
Yields on sovereign debt, which move inversely to prices, broke above key levels in Europe and the US, even after Mario Draghi, the European Central Bank president, warned about the fragility of the eurozone’s nascent economic recovery.
The rising confidence in advanced economies has altered the dynamic of the Group of 20 summit compared with recent years. Leaders of the developed world were relieved to be out of the markets’ spotlight, while leading emerging economies announced they would collaborate to build a defensive fund to counter a capital flight after a torrid summer in currency markets.
Further robust data from the US showed the highest activity in the US services sector since 2005, and led investors to believe the US Federal Reserve was about to start tapering its asset purchases from $85bn a month.
Bullish remarks from UK officials attending the G20 summit suggested the nation’s economic momentum could be compared with the US, while silence from the Bank of England after its monthly meeting encouraged investors to bring forward expectations of interest rate rises. The positive mood even spread to the eurozone, despite cautious comments from Mr Draghi after the ECB’s monthly rate setting meeting.
Gregor MacIntosh, head of sovereign debt at Lombard Odier Investment Managers, said: “Central banks are trying to keep expectations anchored, but markets are not paying attention.”
Yields on two-year US Treasuries rose above 0.5 per cent for the first time since June 2011 and markets priced in the first US Federal Reserve interest rate rise as early as December next year. The yield on the benchmark 10-year note rose 9 basis points to nearly 3 per cent.
By the close of business in Europe, markets were anticipating a quarter percentage point rise in ECB interest rates in July or August 2015 – a few months earlier than had been expected ahead of Thursday’s ECB meeting, according to calculations by Barclays. In the UK, 10-year government bond yields rose above 3 per cent for the first time in two years.
Global stock markets were also buoyed by signs that economic growth may be gathering pace. The FTSE World index rose for a fourth consecutive day, its longest positive streak since late July.
The positive signals from advanced economies contrasted with continued turmoil in emerging economies, where borrowing costs climbed to the highest since October 2011 as investors continued to fret that the end of US monetary stimulus would exacerbate sluggish economic growth in the developing world. Most emerging market currencies fell further against the US dollar on Thursday, with the Indonesia rupiah leading the decline, falling to a fresh four-year low.
At the G20 summit, the Brics countries – Brazil, Russia, India, China and South Africa – announced they would contribute $100bn to a fund to stabilise currency markets, although details of its operation were still to be established.
The sell-off highlighted the shift in sentiment away from the developing economies, which had been hit by financial turmoil, said Steven Major, head of fixed income research at HSBC. “Markets got over exuberant with emerging markets earlier this year and expectations have been far too negative for the developed world – now that has gone into reverse.”
Reporting by Chris Giles, Ralph Atkins, Robin Wigglesworth and Delphine Strauss in London, George Parker in St Petersburg and Robin Harding in Washington
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