Global bonds slide as China reopening fuels inflation angst

London - Global bonds fell in thin trading on concern that

China’s decision to relax Covid-19 curbs

would spur inflation.

European debt led the slide with German 30-year yields rising as much as 18 basis points to 2.45 per cent, the highest since October. The equivalent United States Treasury rate was up as much as 10 basis points at 3.93 per cent, the highest since mid-November, while the 10-year yield jumped 10 basis points to 3.85 per cent. Volumes across markets were muted with several countries, including the United Kingdom, still on holiday.

China will soon

no longer subject inbound travellers to quarantine

and has downgraded the management of Covid-19 from its highest level. An end to self-imposed global isolation that battered the world’s second-largest economy could help spur global economic growth and fuel price increases. That risks lessening the appeal of fixed income even after a year of historic losses.

While many analysts are forecasting a better performance by bonds in 2023, investors remain concerned that persistent price pressures could force the world’s biggest central banks into further tightening. A surprise policy shift last week from the Bank of Japan sent shock waves through global markets.

“We still live in a perverse world where good news is bad news,” Mr Gershon Distenfeld, the co-head of fixed income at AllianceBernstein, said in an interview with Bloomberg Television. “China is a cyclical thing that we have to look at as the largest economy reopens. That may cause inflation to come down a little bit slower than the Federal Reserve would like.”

Most bonds pay a fixed interest rate, making them more attractive to investors when interest rates fall. Conversely, when interest rates rise, bonds are less attractive, causing bond prices to fall. A bond’s yield is based on the bond’s coupon payments divided by its market price, so as bond prices fall, bond yields rise.

The US 10-year break-even rate – a bond market gauge of inflation over the next decade – rose six basis points to 2.29 per cent. It was as low as 2.12 per cent less than two weeks ago.

Treasuries also faced pressure from the start of this week’s auction cycle, the year’s final sales of coupon-bearing debt. It includes US$42 billion (S$56.6 billion) of two-year notes on Tuesday, followed by five- and seven-year notes over the next two days.

While most global bonds sold off on Tuesday, dollar debt from emerging market governments gained as appetite for riskier assets improved. The extra yield investors demand to hold developing-world bonds over similar Treasuries narrowed seven basis points, according to a JPMorgan Chase & Co index.

European Central Bank (ECB) governing council member Klaas Knot said the central bank’s tightening cycle has passed only the halfway point. The ECB would achieve “quite a decent pace of tightening” through half percentage point rises in the next few months before borrowing costs eventually peak by the summer, he told the Financial Times.

“China’s insatiable demand for raw materials and all things energy will push up prices of those commodities, much to the consternation of the Fed and ECB,” said Mr Stephen Innes, managing partner at SPI Asset Management. BLOOMBERG