Rate rise bet fuels bond market rout

A wave of selling sweeping across bond markets resumed on Monday as investors continued to digest the impact of a Donald Trump presidency.

US and European bond prices have sunk in expectation that he will enact inflationary policies that speed the pace of interest rate rises.

On Monday, some bond yields - which rise as the price falls - hit their highest for more than six months.

Bonds globally lost $1.29tn (£1tn) last week, according to Bank of America.

And there is no sign that the bond sell-off is easing, depressing the value of some pension investments and making it more expensive for countries and companies to borrow money.

On Monday, the 30-year US Treasury jumped above 3% for the first time since January. In the UK, the 10-year gilt yields returned to levels not seen since June's Brexit referendum vote. And German 30-year bunds rose above 1% for the first time since early May.

Italian bonds have been among the most affected. Rome's 10-year yields rose four basis points to 2.01% on Monday, their highest in 14 months.

"It is a continuation of this recent trend. There are still these expectations that inflation could go up if the US takes a more expansionary fiscal stance," said DZ Bank strategist Daniel Lenz said.

Jim Cielinski, head of fixed income at Columbia Threadneedle, said the sell-off trend was not surprising, but the "ferocity of the reversal" was.

And in a research note for Societe Generale, analyst Daniel Fermon said that rising interest rates may not be a good thing.

"As central banks are now less active in the bond market and Trump expects to cut taxes and launch a $1tn infrastructure investment plan, increasing the deficit, we believe rising US long-term rates remain a major risk for financial markets," he said.

Dollar strength

Investors had piled into bonds, seeking a safe - but low - rate of return during what has been years of sluggish growth in the US, Europe and Japan.

But since inflation and interest rates are seen as likely to rise, investors are seeking assets with a more attractive return. With a Trump administration promising economic stimulus through spending and tax cuts, investors are worried about putting money into low fixed-payment assets, such as bonds.

That has fuelled share markets since last Wednesday's election result.

Wall Street's Dow Jones index closed at another record high on Friday, in the wake of Mr Trump's unexpected victory. European markets have also risen, and at midday on Monday, the FTSE 100, Cac-40 and Dax were all slightly higher. Earlier, Japan's Nikkei index hitting a nine-month high, closing up 1.7%.

Andrew Walker, World Service economics correspondent

Bond yields are up in the eurozone's financially stressed countries, such as Italy, Spain and Portugal and the moves have been quite pronounced over the last few days. Rising government borrowing costs were one of the central features of the region's financial crisis. So are we are looking at a re-run?

There are three important differences to keep in mind. Those borrowing costs are still well below crisis levels. At the time, a rule of thumb for whether a bailout was needed was ten-year government borrowing costs of more than 7%. Italy has just gone over 2%, Portugal is 3.5%. And it's happening to them all.

Even ultra-safe Germany has seen its government bond yields rise, although they are much lower than Italy's. And the impetus is coming from outside, from political events in the US. Still, it is clear that Europe still has its weaknesses, especially in some countries' banks - Italy and Germany's Deutsche Bank most notably.

The dollar has also strengthened against major currencies. The pound fell 1.1% to $1.2464. Currencies in many emerging markets - from the Mexican peso and Malaysian ringgit, to Turkey's lira and South African rand - fell on fears that protectionism and higher US interest could suck investment from these markets.

"Clearly the market has settled on a 'buy dollar' theme, on the basis there will be a debt-fuelled US fiscal binge that will push up inflation," said TD Securities' European head of currency strategy Ned Rumpeltin.

"There are signs that higher bond yields and the knock of a stronger US dollar are having a domino impact, taking down the weakest risky assets first, before moving on to the next," said Deutsche's global co-head of foreign exchange, Alan Ruskin.

And a senior European Central Bank (ECB) has warned that the uncertainty caused by sudden swings in the financial markets threatened economic recovery.

Speaking in Frankfurt on Monday, ECB vice-president Vitor Constancio said: "We should be cautious in drawing hasty, positive conclusions from those market developments, because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth."