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Bond Yields at Multi-Year Highs as Inflation Heats Up Globally

Tue, Sep 25, 2018 - 7:27am

Originally published at The Boock Report

We're there! 3.11% on the 10-year Treasury yield. Not only that, the 5-year is at 2.99%. Again, 3.11% was the high close for the year touched on May 17th. Any close above that would be the highest since July 2011. Big moment. Bankrate.com last night said its average 30-year mortgage rate was at 4.66%, one basis point from the highest since May 2011.

The selling today in bonds is following the same overseas. After being closed yesterday, Japanese JGB yields continued higher as well. The 10-year yield was unchanged but the 40-year rose another 2 basis points (bps), 7 bps now over the past two trading days. The selling spilled over into Europe with the German 10-year yield up 2.5 bps to .54%, a fresh 4-month high. Italian bonds are the outlier as the government seems to have agreed to a budget deficit of slightly below 2% and the 10-yr yield is down by 10 bps.

The French business confidence index in September did rise 1 pt m/o/m off the lowest level since April 2017 but the internals were mixed. Manufacturing confidence fell 3 pts to the weakest since March 2017 and retail was down 2 pts to the lowest since August 2017. Offsetting this was a 1 pt rise in services and employment. While there was no commentary around the data, I'll assume the trade uncertainty was the reason for the manufacturing drop.

I keep talking about Sweden for the sole reason that they have negative interest rates and are really trying to find the time and will to start getting out. Well, they reported producer price inflation (PPI) for August and it rose 9.3% y/o/y. I had to go back to 1995 the last time I saw a faster rate of wholesale inflation. As it is PPI instead of CPI there wasn't much of a market response but what a central bank dilemma that the Riksbank has created. Meanwhile, they lost their PM today in a vote of no confidence.

SWEDEN PPI
sweden ppi

Spain, by the way, reported a 5.2% jump in PPI and I guess this helps to contribute to the "relatively vigorous" pace of underlying inflation according to Mario Draghi.

The ECB chief economist Peter Praet tried to walk back Draghi's comments today by saying they were nothing new but the euro is up as are yields as stated. I only have this data going back to 2014 but you can see Spanish 10-yr inflation breakevens are near the recent highs. Central banks might just be getting the inflation they want. 

spain 10-year breakeven

For daily macroeconomic analysis and asset class positioning, visit boockreport.com

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