European bonds slid on Tuesday as record UK wage-growth data buttressed the case for more interest-rate hikes, making the prospect of a long-hoped for pivot all the more elusive.
(Bloomberg) — European bonds slid on Tuesday as record UK wage-growth data buttressed the case for more interest-rate hikes, making the prospect of a long-hoped for pivot all the more elusive.
Gilts sank after the UK wage print prompted traders to add to bets on the Bank of England’s terminal interest rate. The weakness spread to other regions, with yields on German 10-year bonds nearing the highest levels in more than a decade.
The moves serve up a reminder that risks in the fixed-income market are rife — even with the bulk of rate hikes now likely done. The debate shifts now to how long rates remain at elevated levels, spelling a volatile period for bonds, particularly given poor liquidity over the summer period.
Markets were already on edge after last week’s surge in spot natural gas prices. That prompted analysts to recommend positioning for a hawkish pivot from the European Central Bank as officials look to stop long-term inflation expectations drifting ever higher.
In the UK, traders are once again entertaining the prospect of an outsized interest-rate hike, with money markets implying almost one-in-three odds of a half-point hike in September. They also lifted their bets on further ECB rate hikes, pricing a 4% terminal rate for the first time since July 24.
Craig Inches, head of rates and cash at Royal London Asset Management, said the UK data exacerbated concerns that inflation is becoming more embedded in the euro area too. Still, he said the price moves Tuesday were overdone, particularly since the UK unemployment rate is rising.
“That should provide some comfort to the BOE that the medicine is working, if somewhat slowly,” Inches said. “We are continuing to build longer duration positions within our portfolios.”
–With assistance from Dayana Mustak.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.