Commodity prices add to inflation concerns

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A bond sell-off unsettled global financial markets this week as the benchmark
10-year US Treasury yield breached the 5 per cent threshold for the first time since June 2002.

Bond yields pushed higher on expectations that a strengthening global economy would spur central banks to raise interest rates higher than previously anticipated. Surging commodity prices also added to concerns about the inflationary outlook with some base
metals, gold and oil all crossing milestones.

Analysts said that long-term bond yields were finally responding to such pressures after stubbornly persisting at low levels – a phenomenon famously described by Alan Greenspan, former US Federal Reserve chairman, as a conundrum.

“The long wait to 5 per cent in the US has ended,” said Lehman Brothers’ bond strategy team. It said the yield curve – the spread of yields across the range of bond notes – was ultimately unable to endure the steady onslaught of central bank monetary policy tightening.

Other analysts said Treasuries also were being hit by concerns that foreign investors might scale back purchases of US bonds to buy domestic assets as yields rose in Europe and Japan.

Lehman said the 10-year US Treasury yield could rise further to 5.25-5.5 per cent this year. However, it said from a yield perspective, the US bond market had now become the most attractive since early 2002.

Economic data this week provided more fresh evidence of a stronger US economy in the form of better than expected retail sales for March and a buoyant consumer sentiment survey by the University of Michigan.

The yield on the 10-year Treasury rose for the third successive week, ending Thursday at 5.05 per cent, 7 basis points up on the week. In the eurozone the 10-year Bund yield gained 6bp over the week to 3.95 per cent. In the UK, 10-year gilts were yielding 4.54 per cent, up more than 10bps.

Financial markets will be paying close attention to the release on Tuesday of minutes of the March meeting of the US central bank’s rate-setting Federal Open Market Committee.

Investors will be hoping for clues on how far the Fed will go in tightening monetary policy. There will also be economic data, including producer prices numbers on Tuesday and consumer prices figures on Wednesday.

Data on Monday will show the extent of purchases of US assets by foreign investors in February.

The cental bank lifted its benchmark Fed funds rate to 4.75 per cent last month and another quarter-point rate rise to 5 per cent is expected at its next meeting in May. The market is also pricing in a roughly 40 per cent chance of a further quarter-point rise to 5.25 per cent at the meeting in June.

The other standout theme of the week was the continued surge in commodity prices.

Gold broke through the $600 an ounce mark for the first time since December 1980. Copper rose through the $6,000 a tonne mark to hit a record $6,145 a tonne on continued concerns about supply.

Oil prices also continued to ascend. Brent hit a record $70.68 a barrel while West Texas Intermediate added 71 cents to $69.32 a barrel over the week.

Equity markets were subdued as investors worried about the impact of the rising bond yields and commodity prices.

On Wall Street, the Dow Jones Industrial Average ended 0.2 per cent higher. However, the S&P 500 dropped 0.5 per cent and the Nasdaq Composite fell 0.6 per cent.

Next week will mark the start of the peak weeks for the US first-quarter earnings season. Some 119 S&P constituents are expected to report. Earnings growth for all the S&P 500 companies is expected to be 10.4 per cent for the quarter.

In Europe, the trend was similar with the FTSE Eurofirst 300 slipping 0.5 per cent. Italy’s stockmarket benchmark the S&P/MIB Index fell 0.8 per cent amid concerns that the tight result to the country’s elections would damp the prospects for reform. In Tokyo, the Nikkei 225 Average fell 1.88 per cent.

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