PA ANALYSIS: Is the bond sell-off a blip or just the beginning?

Added 28th October 2016

Yields rose notably this week and investors will be considering whether to stick to their guns to avoid making a paper loss a real one, or get out before things slide further.

PA ANALYSIS: Is the bond sell-off a blip or just the beginning?

Both investment grade corporates and government bonds took a hit as economic data surprised on the upside and inflation expectations gathered steam.

The argument that the recent movements are a blip centres on the fact that a large factor in the rise in gilts and treasuries yields was the forecast beating GDP growth reported in the UK and US.

On Thursday it was revealed the UK economy grew 0.5% in Q3 even as the country was coming to terms with the Brexit vote, while on Friday United States annualised GDP growth in Q3 was reported to be 2.9%, comfortably ahead of the 2.5% forecasted.

Investors, with a large degree of justification, took these numbers as indicating The Bank of England is less likely to carry out further easing, and the Federal Reserve is more likely to raise rates in December.

Adding weight to the line of argument is the oil price recovery, which while still very limited relative to where prices were before the slide, will add wind to the sails of the inflationary pressures that can force the hand of central bankers.

"Investors, with a large degree of justification, took these numbers as indicating The Bank of England is less likely to carry out further easing, and the Federal Reserve is more likely to raise rates in December"

Those who would argue that the sell-off is more akin to a blip than the beginning of a long-running climb in yields can point to how inconsistent economic data has been over the past couple of years. GDP figures have see-sawed between outstripping and undershooting consensuses expectations, as have employment numbers.

Then there is the geopolitical wall of worry, which is about as tall and ominous looking as it has been for some considerable time. Russian sabre rattling, the volatile and divisive US election, and potential turmoil in the European Union as populists gain ground in French and Dutch elections among other things all could spook markets.

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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