Barclays analysts have cautioned that the surge in bond yields, which is driving up government borrowing costs, is unlikely to subside until there is a significant downturn in stock markets. The recent bond sell-off has pushed UK 30-year gilt yields to their highest level since 1998, causing stocks to struggle due to rising yields in the bond market.
As bond prices decline and yields rise, investors find stocks less attractive. This results in less investment in stocks and a shift towards bonds, which offer higher returns. The increase in yields also affects corporate profits and the cost of government borrowing.
Ajay Rajadhyaksha, an analyst at Barclays, suggests that the bond sell-off may only end if there is a repricing of stocks, often referred to as “risk assets”. He explains that there is no specific yield level that will automatically attract enough buyers to trigger a sustained bond rally. However, if risk assets experience a significant decline in the coming weeks, it could potentially lead to a material bond rally.
Rajadhyaksha further states that the magnitude of the bond sell-off has made stocks more expensive from a valuation standpoint compared to a month ago. Therefore, he believes that the stabilizing path for bonds lies in a further downward re-pricing of risk assets.
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What happened overnight
Asian shares saw gains following a drop in oil prices and a recovery in Wall Street. Tokyo, Sydney, Seoul, and Hong Kong all experienced gains, while Chinese markets were closed for a holiday.
The decline in oil prices by $5 on Wednesday helped boost market sentiment, as it alleviates inflationary pressures faced by central banks. Japan’s Nikkei 225 jumped by 1.5% to 30,969.71, Sydney’s S&P/ASX 200 gained 0.5% to 6,925.50, South Korea’s Kospi added 0.8% to 2,424.90, and Hong Kong’s Hang Seng index increased by 0.7% to 17,321.16.
Brent crude, the international standard, gained 61 cents to $86.42 after a drop from over $91. This drop was due to the Energy Information Administration reporting a 4.6 million barrel increase in commercial petroleum products. Gasoline inventories rose above average levels.
Wall Street stocks closed higher after new data revealed weaker-than-expected growth in US private payrolls for September. The Dow Jones Industrial Average rose by 127.17 points or 0.39% to close at 33,129.55. The S&P 500 finished 34.3 points or 0.81% higher at 4,263.75, while the Nasdaq Composite added 176.54 points or 1.35% at 13,236.01.
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