By Alun John and Stella Qiu LONDON/SYDNEY, May 20 Government bonds steadied on Wednesday after a steep selloff that sent yields to multi-year highs on war-driven inflation fears, a calmer backdrop which helped stocks rise ahead of closely watched results from Nvidia.
Investors are bracing for higher energy prices – driven by the effective closure of the Strait of Hormuz – to feed into broader inflation and force central banks to raise interest rates
The U.S. 30-year Treasury yield climbed to 5.20% overnight, a level last seen in 2007, while the benchmark 10-year U.S. yield hit a 16-month high of 4.687%. Both gave back a few basis points on Wednesday, however, to 5.17% and 4.65% respectively, but remained at levels that threatened pain for other asset classes, especially with no immediate reasons for relief in sight. Mohit Kumar, chief European economist at Jefferies, said they had advised clients to avoid longer-dated bonds. “Even if we stay in this ‘No War No Peace’ scenario for an extended period, it would have a negative impact on oil prices and inflation.
We should also see government support for fuel subsidies and an increase in unemployment benefits as the oil shock reduces economic activity,” he said. “Higher rates should also start feeding into risky assets,” he added, which typically refers to stocks and other asset classes such as corporate credit. There were tentative signs of easing pressure from the Gulf on Wednesday, as two Chinese oil tankers exited the Strait of Hormuz, shipping data showed, following positive comments from the U.S. president and his deputy. Brent crude futures fell 2%.