Bond prices around the world fell, sending yields higher, on Thursday as news of an interest rate rise in China sent shockwaves through the markets.

It was China’s first change in rates in nine years and took the banks one-year rate to 5.58 per cent, up 27 basis points.

Bonds fell as oil prices slid and investors took profits on the recent bond rally, exacerbating the move.

Alan Ruskin, director of research at consultancy 4Cast, said China’s move was a “double-edged sword” for the bond markets.

“Much of traders’ attention has been on oil prices, and te impact on oil has set the immediate bearish tone for Treasuries. However to the extent that China’s rate hike encourages flows into the renminbi and Asian currencies in general, the more this will add to intervention flows into Treasuries,” he added.

By late trade in New York, the yield on the two-year note was up 10.21bp at 2.589 per cent, but off a peak above 2.67 per cent. Ten-year notes had recovered their equilibrium and the yield was down 2.1bp at 4.064 per cent.

Prices for UK gilts fell on China’s announcement, with the market failing to find comfort in firm demand for an auction of £2.5bn in 10-year paper.

Two-year gilt yields rose 4.5bp to 4.547 per cent, while 10-year yields added 4.4bp at 4.755 per cent.

In the eurozone, yields on two-year German Schatze were up 1.6bp at 2.449 per cent, while 10-year yields rose 2.5bp to 3.896 per cent.

Japanese government bond prices were lower. The yield on the 10-year JGB was up 5.5bp at 1.485 per cent.

But activity was subdued ahead of the Bank of Japan’s semi-annual report on the economy today and its view on whether the economy is finally emerging from nearly a decade of deflation.

John Richards, strategist at Barclays Capital in Tokyo, was bearish on the near-term outlook for bonds based on strong oil prices, rising Treasury yields and rallying equities.

“Japanese investors who might ordinarily be dip buyers may be sidelined ahead of the US election and the US employment report,” he added.

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