Worst bond rout in a generation

Treasury yields rose again for the tenth straight week in spite of Bank of England’s gilt market operation after investors rejected PM Liz Truss’s plan for tax cuts and new spending. The BoE indeed announced it will carry out temporary purchases of long-dated UK government bonds from 28 September to avert credit crunch. This news triggered a bond rally on both sides of the Atlantic, but not enough to offset all the losses suffered earlier in the week. Yet, UK inflation-linked bonds managed to weather the storm. By way of example, the iShares £ Index-Linked Gilts UCITS ETF (INXG) gained 10.75% over the week.

Source; Trackinsight

The benchmark 10-year U.S. Treasury yield jumped from 3.69% to 3.83% week-over-week, its highest level since 2010, while the 2-year T-note climbed to 4.27%. In Europe, the German 10-year yield added 9 basis points (2.11%). The French 10-year OAT yield closed at 2.73% (+13 basis points). Italy’s 10-year bond yield hit its highest since October 2013 at 4.51% (+16 basis points), after the rightist coalition won a clear majority in Sunday’s elections.

The wild swings in the world’s safest assets resulted in another bloodbath in all bond segments, exacerbated by fears of a major bank failure in Europe. The rapid rise in Credit Suisse CDS to levels last seen during the last financial crisis, suggested growing worries about the Swiss banking giant’s financial health. Financial Times reported that “Senior Credit Suisse executives spent the weekend reassuring large clients, counterparties and investors about the Swiss bank’s liquidity and capital position in response to concerns raised about its financial strength.”

Investment grade corporate bonds slid 1.04% in Europe, extending their losing streak to nine weeks (Markit iBoxx Euro Liquid Corporates TR Index down 14.28% for the year). The Bloomberg Barclays Global Aggregate Corporate Bond TR Index in USD lost 1.36%, bringing its year-to-date performance to -20.98%. High-yield bonds followed suit, with the Markit iBoxx EUR Liquid High Yield TR Index down 1.93% (-13.64% YTD) and the Markit iBoxx USD Liquid High Yield Capped TR Index down 0.76% (-12.50% YTD).

Emerging debt in local currencies did worse, down 2.10% (-21.15% YTD) though the U.S. Dollar Index fell below the 113 mark (112.17).