July 7, 2017 / 2:13 PM / 7 months ago

Bond market likely to sell off as policy shifts priced in

LONDON (Reuters) - Shifting market perceptions about central bank policy suggest world bond markets are at a tipping point and the rise in yields over the past week could have further to go, investment managers said on Friday.

Comments from central banks in the euro zone, Britain and Canada since early last week have led to a view that an era of ultra-loose policy is drawing to a close.

That in turn has sparked heavy selling in government bond markets, where yields have long been pinned down by record-low interest rates and monetary stimulus.

Because quantitative easing (QE) was used as a substitute for negative interest rates, unwinding QE will be a key part of the normalisation of rates policy, Chris Iggo, CIO for global fixed income at AXA Investment Managers, said in a note.

”The significant increase in government bond yields over the last week suggests that markets are starting to price this in,“ he said. ”My guess is that it will have quite a bit further to go. 

In the space of just over a week, benchmark German 10-year Bund yields have doubled -- vaulting above 0.50 percent to 18 month highs DE10YT=TWEB.

U.S. 10-year Treasury yields are up 23 basis points from the start of last week US10YT=RR, while Japanese bond yields shot up to five-month highs earlier on Friday -- prompting the Bank of Japan to promise unlimited bond purchases to keep a lid on bond yields.

“There’s no doubt that there has been a significant repricing in the last week and a half across global bond markets,” Deutsche Bank strategist Jim Reid said in his daily note on Friday.

In the euro zone, comments from European Central Bank chief Mario Draghi last week fuelled talk that the ECB was likely to start scaling back its bond-buying stimulus in coming months.

ECB officials, unnerved by the bond market reaction, have since tried to soothe markets, stressing they would be cautious about any change in policy, but yields have remained elevated.

The shake-out in bond markets follows a period when investors were too complacent, said Mark Dowding, co-head of investment grade debt at BlueBay Asset Management.

He said that U.S. jobs data suggested the selloff could be contained given signs that wage growth is modest, but added that bond markets remained vulnerable to further selling.

“A lot of markets are at important technical levels, so losses could beget further selling and if that were to occur you could see more volatility across world markets,” Dowding said.

“There is a sense that we are at a cuspy point in bond markets.”

Reporting by Dhara Ranasinghe; editing by Nigel Stephenson

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