Bond market blues hammer stocks, drive euro higher

Tue May 12, 2015 7:07am EDT
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By Nigel Stephenson

LONDON (Reuters) - Government bonds sold off again on Tuesday, driving down stocks and helping push the euro sharply higher against the dollar.

Ten-year U.S. Treasury yields US10YT=RR, the benchmark for global borrowing costs, hit their highest since early December, while German 10-year yields DE10YT=TWEB added 12 basis points to 0.71 percent.

Volatility in the bond markets weighed on stocks, adding to existing investor anxiety over the perilous state of Greece's finances. Shares in Europe and Asia fell and Wall Street was expected to follow in their wake, index futures showed ESc1.

"It's a matter of concern for the market. When any particular asset class goes through periods of extreme volatility in a short space of time, people feel the pressure to take their risk exposure lower," Ian Richards, global head of equities strategy at Exane BNP Paribas, said.

Less than a month ago German 10-year yields hit a record low of 0.05 percent, driven down by a 1 trillion euro European Central Bank bond-purchase scheme intended to kick-start inflation.

Traders, who struggle to fully explain the recent yield surge, blame it on a rise in inflation expectations, higher oil prices, and restricted liquidity, caused by ECB purchases, as investors sought to exit a crowded trade.

"It's clear that the market hasn't stabilized. Before the sell-off started the common perception was one of low volatility. Now investors are more cautious, asking for a premium for the volatility we've seen recently," said Jan von Gerich, chief fixed income analyst at Nordea.

Higher German yields lifted the euro EUR= 1 percent to $1.1265, having fallen close to Monday's low of $1.1131 in Asian trade. It was also up 0.9 percent at 135.02 yen EURJPY=.   Continued...

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange, Germany, May 8, 2015.     REUTERS/Remote/Staff