Morning Auction: Bond Earthquake | Reuters

A look at the day ahead in US and global markets from Mike Dolan

As everyone watches Wyoming, global bond markets shook again this week even as equity markets stabilized.

Regardless of the signals sent by Federal Reserve chief Jerome Powell or the long list of foreign central bankers at the Jackson Hole conference from Thursday, upward pressure on bond yields has intensified regardless. . Read more

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Energy-related inflation fears are rising again, particularly in Europe, as natural gas and electricity prices continue to soar and crude oil prices rebound.

And while central banks will be forced to keep raising interest rates, the looming recessions this winter raise doubts about whether monetary authorities will be able or willing to bring price increases back to their target.

On top of that, estimates of the bill for governments to mitigate energy shocks to households and businesses are rising – with some reports this week it could cost the UK government up to 100 billion pounds ($118.4 billion ), most of which should be borrowed from the bond and bond markets.

Although governments have been successful in managing this crisis borrowing over the past 15 years, it was done when the cost of this borrowing was falling. With inflation back in the mix, these borrowing rates are rising sharply as central bank “quantitative easing” programs are reversed as they unwind bond holdings from the balance sheet and build on bond markets. rather than supporting them.

This is prompting another potentially deadly repricing of bonds and wondering whether pressures on public debt will allow central banks to put inflation back in the bottle.

Yields on 2- and 10-year US Treasuries hit their highest levels since June on Wednesday and maintained those moves today. Much of the gains were driven by higher 2-, 5- and 10-year inflation expectations, with some citing President Joe Biden’s student debt cancellation plan as worsening the price outlook. Read more

But the surge in bond yields was global and no doubt driven by a rise in UK gilts, where 2-year yields hit their highest level since the 2008 crash and the 2-10-year yield curve was more inverted. that at any time since then as well.

German 10-year yields also hit their highest level since June, with better-than-expected German GDP in the second quarter and August business surveys on Thursday. Read more . Minutes of the European Central Bank policy meeting are expected later.

Stocks continued to hold up despite the bond jolt and U.S. futures are up ahead of Thursday’s open, with China’s latest $44 billion fiscal stimulus also helping the mood in Asia .

The dollar has also retreated from recent highs, with many reports citing news that China’s foreign exchange regulator has warned banks against selling yuan. Read more

South Korea’s central bank raised its benchmark policy rate by a quarter of a percentage point to 2.50%, resuming normal increases of 25 basis points after making an unprecedented 50 basis point hike in July.

G7 returns over 2 years

Key developments that should further guide US markets later on Thursday:

* US Q2 GDP revision, core PCE; weekly jobless claims; Kansas City Fed Manufacturing Activity Index in August

* Annual Jackson Hole Central Bank Forum Begins

*July ECB Policy Meeting Minutes* Gains: Dollar Tree, Dollar General, Peloton, Affirm, Workday, Marvell Technology

* US Treasury Auctions 7-Year Notes; UK gilt auctions 2025

($1 = 0.8448 pounds)

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By Mike Dolan, editing by Emelia Sithole-Matarise; [email protected]. Twitter: @ReutersMikeD

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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