(Bloomberg) -- UK government bonds led a global selloff as investors around the world come to terms with the prospect of a protracted period of tight monetary policy.
The yield on 10-year gilts rose as much as 20 basis points to 4.56% on Thursday, the largest daily rise in almost a year on a closing basis.
Germany’s benchmark bond rose 12 basis points to just below 3%, a level it hasn’t touched since 2011. The equivalent rate in the US climbed to 4.69%, the highest since 2007.
The moves are part of a sharp repricing that accelerated this month, and which undermines one of the market’s favored bond trades of the year.
After piling into long-dated securities to hedge against the prospect of a sharp economic slowdown, traders are facing up to a host of potential headwinds including surging oil prices that threaten to keep inflation elevated and erode their appeal.
“It’s clear that policymakers are looking to keep rates high for some time,” said Althea Spinozzi, a strategist at Saxo Bank, referring to the selloff in the UK.
The market is also facing up to an increase in the supply of bonds. In Europe, the central bank could speed up the pace at which it’s shedding bonds from its balance sheet, while government bond sales are expected to remain high to finance their spending as the economy starts to slow.
Even yields in Japan — the last bastion of easy monetary policy among developed markets — are on the move. The yield on Japan’s 20-year government bonds rose to their highest level since 2014 earlier on Thursday as traders test the central bank’s ability to keep borrowing costs low.
In the UK, money markets are now fully pricing a quarter-point hike for the first time since the Bank of England held policy rates steady last week. They have also pared wagers on the scope for monetary easing next year, no longer fully pricing a cut to 5% in 2024. The current level is 5.25%.
The move in the UK bond was more pronounced, exacerbated by their recent outperformance. So far this month, 10-year gilt yields are up fewer than 20 basis points. That compares to around 50 basis points on both bunds and US Treasuries.
“It’s a catch up move with US and Europe,” said Mark Nash, portfolio manager at Jupiter Asset Management, referring to the gilts move. “Oil prices are rising. UK has massive overseas borrowing and capital getting tighter. Yields need to rise.”
--With assistance from Anchalee Worrachate and James Hirai.
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