UK data prompts global bond sell-off as prospect of rate cut dims

PUBLISHED : Friday, 28 October, 2016, 12:25am
UPDATED : Friday, 28 October, 2016, 12:25am

Strong growth data in Britain prompted the worst daily sell-off in gilts for months and pushed yields on the world’s benchmark bonds higher on Thursday, as expectations for a Bank of England rate cut fell.

Britain’s 10-year government bond was up 12 basis points to 1.27 per cent, on track for its biggest daily rise since June 2015.

The yield is also now at the highest level since Britain’s June vote to leave the European Union, and it has prompted a sell-off in other major government benchmarks.

German and US equivalents rose to their highest since early June at 0.19 per cent and 1.86 per cent, respectively.

With the market worried that central banks are stepping back from the ultra-accommodative stance of recent years, a reduced chance of a rate cut was enough to push benchmark bonds in Europe and US to their highest level since the Brexit vote in late June.

“The stronger GDP print in the UK has given further weight to speculation that the BoE will not provide further stimulus anytime soon,” said Rabobank strategist Richard McGuire.

“The market reaction to strong data prints has become more dramatic in the wake of speculation that central banks’ modus operandi is changing and they are more focused on the negative effects of unconventional stimulus measures than the benefits,” he said.

British gross domestic product expanded by 0.5 per cent in the July-September period, less rapid than the unusually strong growth of 0.7 per cent seen in the second quarter but comfortably above a median forecast of 0.3 per cent in a Reuters poll of economists.

“There’s been a general build-up of inflation expectations, so I think this data adds to that and has just given yields that extra push,” said Investec economist Victoria Clarke.

French and US GDP data due out on Friday could give further impetus to inflation expectations.

A key main gauge of long-term inflation expectations, the five-year breakeven forward, hit 1.4813 per cent on Thursday, its highest level since May.

Concerns over reduced stimulus have increased in recent times, ever since the Bank of Japan on September 21 changed its focus from money printing to targeted government bond yields .

Rumours that the European Central Bank may reduce the scale of its asset-purchase programme exacerbated the concerns, and 10-year German Bund yields, the region’s benchmark, are now 34 basis points higher than the September trough of minus 0.16 per cent.

d yields rose as much as 7 basis points on Thursday to hit a three-mon