# Analysis-Watch out risk assets, the rout in bonds is coming your way
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-03-01
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Inflation spurs bond sell-off, riskier assets next
Meta Description: Get insights into how high inflation fears are driving central banks to hike rates, potentially impacting equities and credit markets next.
URL: https://financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-wayhtml

![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-03-01t155050z1lynxmpej201ocrtroptp4global-bonds-selloff-1736814397743-compressed.jpg)

By Dhara Ranasinghe, Nell Mackenzie and Yoruk Bahceli

LONDON (Reuters) – The selling gripping the world’s biggest bond markets, on fears that stubbornly high inflation will keep central banks hiking interest rates for some time, is a warning sign that riskier assets will likely be next in the firing line.

After all, if central banks hike rates for longer than expected, that raises risks of a sharp economic downturn, a scenario markets have put aside given robust economic data.

That means [bond pain may soon weigh on equities and credit](https://www.financedigest.com/mitsubishi-ufj-to-postpone-at1-bond-issuance-in-credit-suisse-fallout.html "Mitsubishi UFJ to postpone AT1 bond issuance in Credit Suisse fallout"), markets that have held up well so far.

This week’s stronger-than-expected [February inflation](https://www.financedigest.com/french-inflation-revised-upwards-in-february-to-7-3-final-figures.html "French inflation revised upwards in February to 7.3% – final figures") data from France, Spain and Germany has led traders to price European Central Bank rates peaking near 4%, following similar moves in U.S. [money markets](https://www.financedigest.com/6-easy-ways-to-save-money-with-printed-marketing-materials.html "6 easy ways to save money with printed marketing materials").

That has pushed 10-year [bond yields across the euro](https://www.financedigest.com/delivery-hero-ramps-up-interest-payments-to-raise-1-billion-euro-convertible-bond.html "Delivery Hero ramps up interest payments to raise 1 billion euro convertible bond") area to levels last seen during the bloc’s 2011-2012 debt crisis. Yet, [European shares](https://www.financedigest.com/european-shares-hit-nine-month-high-dollar-wobbles-after-powell-remarks.html "European shares hit nine month high, dollar wobbles after Powell remarks") are not far off one-year highs.

And while U.S. 10-year [Treasury yields](https://www.financedigest.com/wall-st-flutters-treasury-yields-ease-as-powell-resumes-testimony.html "Wall St flutters, Treasury yields ease as Powell resumes testimony") rose almost 40 basis points in February – their biggest monthly jump since September – the S&P 500 ended the month down just 2.6% and is up almost 3.5% so far in 2023.

We are starting to reach a level in pricing on rates that any move up in yields is [becoming more problematic,” said BlueBay Asset Management chief investment](https://www.financedigest.com/volkswagen-to-invest-in-mines-in-bid-to-become-global-battery-supplier.html "Volkswagen to invest in mines in bid to become global battery supplier") officer Mark Dowding.

There will be a landing for the economy and if we see more robust data and inflation staying high it will [bring the idea of hard landing back](https://www.financedigest.com/trump-charges-bring-new-york-zombie-case-back-to-life.html "Trump charges bring New York ‘zombie case’ back to life") into prospect,” Dowding said, noting that he had closed out of a position betting on further weakness in longer dated bonds and turned more negative on risk assets.

In its weekly note, the BlackRock Investment Institute said it preferred short-term government bonds and investment-grade credit over long-term government debt and was underweight developed market equities because “they’re not pricing the recession we [see ahead.”](https://www.financedigest.com/italys-mps-sees-safe-habour-ahead-after-strong-quarter.html "Italy’s MPS sees ‘safe habour’ ahead after strong quarter")

[HOT INFLATION](https://www.financedigest.com/dollar-slips-yuan-gains-on-china-pmi-hot-inflation-lifts-euro.html "Dollar slips, yuan gains on China PMI; hot inflation lifts euro")

Expectations that inflation would [ease and central banks](https://www.financedigest.com/bank-shares-rise-after-credit-suisse-rescue-eases-crisis.html "Bank shares rise after Credit Suisse rescue eases crisis") could pause aggressive tightening soon had already turned around in February on resilient data.

But rate-rise expectations have taken another leg higher this week, led by Europe. [Data on Wednesday showed no let-up in stubborn price pressures in Germany](https://www.financedigest.com/tesla-to-warn-of-data-privacy-risk-from-car-security-cameras-in-germany.html "Tesla to warn of data privacy risk from car security cameras in Germany"). Spain and France [posted unexpected inflation rises](https://www.financedigest.com/uks-wetherspoon-posts-13-1-rise-in-sales-for-25-wk-period.html "UK’s Wetherspoon posts 13.1% rise in sales for 25-wk period") on Tuesday.

A key gauge of the market’s long-term [euro zone inflation](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") expectations has risen to 2.51%, its highest level in over a decade, pushing above U.S. peers in a rare occurrence.

[Euro vs US market inflation](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") expectations https://fingfx.thomsonreuters.com/gfx/mkt/lbpggljkepq/euro%20vs%20us%205y5y.png

![](https://onlineworldnews.com/wp-content/uploads/2023/03/euro-vs-us-5y5y.jpg)

Deutsche Bank strategist Jim Reid said the rates repricing in Europe was “pretty astonishing” given that just a [year ago there were doubts about whether the ECB would be able to lift rates at all and German Bund yields briefly turned](https://www.financedigest.com/2043-the-year-britain-will-turn-cashless.html "2043: The year Britain will turn cashless") negative as war in Ukraine broke out.

U.S. and German [bond yield](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule") curves meanwhile remain deeply inverted, with short dated borrowing costs well above longer dated peers in a classic sign of looming recession.

Major [economies still have a long way](https://www.financedigest.com/a-two-way-street-chinese-investment-in-the-uk-will-benefit-both-economies.html "A TWO WAY STREET: CHINESE INVESTMENT IN THE UK WILL BENEFIT BOTH ECONOMIES") to go to achieve comfortable inflation levels. As a result, policy [rates are still at risk of staying higher](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high") for longer, and fixed income markets have adjusted accordingly,” said Bruno Schneller, a managing director at INVICO Asset Management. Equity markets appear expensive when considering the possibility of prolonged [higher rates.”](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom")

Patrick Saner, head of macro strategy at Swiss Re, added that rising [government bond yields also made risk](https://www.financedigest.com/5-challenges-to-overcome-in-governance-risk-and-compliance-magazine.html "5 Challenges to Overcome in Governance, Risk and Compliance-Magazine") assets relatively less attractive.

A classic 60/40 portfolio of [equities and bonds now yields](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold") less than six-month U.S. Treasury bills for the first [time in around 20 years](https://www.financedigest.com/world-food-prices-rise-for-first-time-in-a-year-fao.html "World food prices rise for first time in a year- FAO"), he noted.

The U.S. yield curve is deeply inverted https://fingfx.thomsonreuters.com/gfx/mkt/jnvwyalekvw/USYC.PNG

![](https://onlineworldnews.com/wp-content/uploads/2023/03/USYC.jpg)

BUY BONDS?

And while government [bonds were seen vulnerable to further selling](https://www.financedigest.com/bank-of-england-sets-out-plans-to-sell-23-billion-corporate-bond-stockpile.html "Bank of England sets out plans to sell  billion corporate bond stockpile"), higher yields are still viewed as a buying opportunity.

Snigdha Singh, co-head of fixed income, currencies and [commodities trading](https://www.financedigest.com/a-brits-guide-to-understanding-commodity-trading.html "A Brit’s Guide to Understanding Commodity Trading") for EMEA at BofA, expected investor allocations to return to bonds, especially in Europe where negative yields have disappeared.

In sovereign markets now, 10-year [German bond yields](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") are north of 2.70%. So I would [expect certainly to see those kinds of allocations take place,”](https://www.financedigest.com/revealed-the-top-5-places-brits-expect-to-find-the-one-in-2016.html "REVEALED: THE TOP 5 PLACES BRITS EXPECT TO FIND ‘THE ONE’ IN 2016") Singh said.

UBS strategist Rohan Khanna said he suspected investors still wanted exposure to longer-dated [debt and was “very doubtful that the ‘bonds are back’](https://www.financedigest.com/european-junk-debt-sales-spring-back-to-life-as-sentiment-improves.html "European junk debt sales spring back to life as sentiment improves") theme is going to die.

(Reporting by Dhara Ranasinghe and Nell Mackenzie in London, and Yoruk Bahceli in Amsterdam; Editing by Toby Chopra)


---
This blog is powered by Superblog. Visit https://superblog.ai to know more.
---