Overview: Bond yields rise on recession fears

Listen to this article


The recent rally in US and European equities juddered to a halt on Thursday as unsettling economic releases on both sides of the Atlantic shifted the focus back to fundamentals and sent investors scurrying for the safety of government bonds.

Fresh jitters over US financials were stoked when Gimme Credit, the research firm, said Washington Mutual, the largest US savings and loan institution, was enduring a funding squeeze from the market.

Kathleen Shanley, strategist at Gimme Credit said: “We feel duty-bound to point out that many of WaMu’s unsecured creditors are quietly reducing their exposure to the troubled bank, increasing its relative reliance on insured deposits and FHLB borrowings.”

In the US, the two-year Treasury yield fell 21 basis points to 2.62 per cent as safe haven flows boosted prices. US credit spreads were also wider, led by a 12bp jump the volatile members of the CDX index.

Weak June existing home sales data underlined the grim outlook for the US housing market, while labour market worries were heightened by a big rise in initial jobless claims this week. Some analysts, however, attributed the spike in claims to seasonal distortions.

Poor US corporate earnings from the likes of Ford and Dow Chemical also dented the recent mood of optimism in equity markets. In New York, the S&P 500 fell 2.3 per cent, with financials lower by nearly 7 per cent, their worst one-day decline since the credit crunch began a year ago. In Europe, the FTSE Eurofirst 300 index fell 1.5 per cent. However, the Nikkei 225 in Tokyo rose 2.2 per cent in spite of news that Japanese export growth had slowed sharply.

Oil rallied modestly following its huge decline over the past week, but was held back by falling natural gas prices. September West Texas Intermediate rose $1.05 to $125.49 a barrel, but still down nearly $23 from its recent record high.

David McBain, at Absolute Strategy Research, said that while the recent slide in the oil price appeared notable in dollar terms, the move represented little more than a “blip” in terms of the underlying bull trend.

“To break the back of the current uptrend, oil would have to sustain a break back below its 200-day moving average of $106, which in itself would likely require a move back to retest support around $100,” he said.

Marco Annunziata, chief economist at UniCredit, said recent developments had challenged the view that oil prices were being driven almost exclusively by fundamentals.

“If commodities have experienced a bubble, this would suggest global liquidity is still dangerously high, and central banks might refocus more decisively on the unfinished business of normalising monetary conditions, interrupted a year ago by the financial crisis.”

“We might therefore see more pronounced monetary tightening than markets have come to expect,” he said

However, expectations in the eurozone moved away from rate rises following the latest survey data.

Purchasing managers’ data showed that activity in both the manufacturing and services sectors in the region deteriorated from 49.3 to 47.8 in July, its lowest level since November 2001.

Furthermore, German business sentiment weakened this month to its lowest level for nearly three years, according to the Ifo economic institute.

Ben May, European economist at Capital Economics, said the data would “surely prevent the European Central Bank from raising interest rates further”. “On the face of it, the surveys suggest there is now even a risk of a technical recession in the region,” he said.

European government bonds rose sharply, driving the yield on the 10-year Bund down 9 basis points to 4.57 per cent and the two-year Schatz yield by 15bp to 4.44 per cent. The 10-year gilt yield dropped 6bp to 4.98 per cent after news that UK retail sales had slumped 3.9 per cent last month, wiping out May’s sharp increase and dragging annual sales growth down to 2.2 per cent from 7.9 per cent.

In the money markets, the Sonia (sterling overnight index average) swap curve moved to reflect a paring back of expectations for higher UK interest rates this year following the release of the data.

But Nick Kounis, chief European economist at Fortis Global Markets, noted that the retail sales deflator had hit its highest level since May last year. “This underlines that significant inflationary risks will prevent the Bank of England from coming to the rescue any time soon. Indeed, any near-term move is more likely to be a hike than a rate reduction although our base scenario sees interest rates remaining on hold this year.”

On the currency markets, the New Zealand dollar fell sharply after the country’s central bank cut interest rates for the first time in five years. The euro touched a two-week low against the dollar after the weak eurozone survey data, while sterling fell across the board.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.