Marketmind: Bond quake

© Reuters. A screen displays market information on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 3, 2022. REUTERS/Andrew Kelly/File Photo

A look at the day ahead in U.S. and global markets from Mike Dolan

With everyone watching Wyoming, global bond markets have shuddered again this week even as stock markets stabilised.

Whatever signals are sent by Federal Reserve chief Jerome Powell or the long list of overseas central bankers at the Jackson Hole conference starting on Thursday, upward pressure on bond yields has intensified regardless.

Energy-driven inflation fears are mounting again, especially in Europe, as natural gas and power prices continue to soar and crude oil prices rebound.

And even though central banks will be forced to keep lifting interest rates, looming recessions this winter are raising doubts about whether monetary authorities will have the scope or willingness to get price rises back to target any time soon.

On top of that, estimates of the bill for governments in easing the household and business energy shocks is mounting - with some reports this week it could cost the British government up to 100 billion pounds ($118.4 billion), most of which would have to be borrowed on bill and bond markets.

While governments have successfully managed such crisis borrowing over the past 15 years, it was done when the cost of that borrowing was falling. With inflation now back in the mix, those borrowing rates are rising sharply while central banks' 'quantitative easing' programmes are being reversed as they unwind balance sheet bond holdings and lean against the bond markets rather than supporting them.

That makes for a potentially bruising further repricing of bonds and questions whether government debt pressures will allow central banks to put inflation back in the bottle.

U.S. 2- and 10-year Treasury yields climbed to their highest levels since June on Wednesday and have held those moves today. Much of the gains were driven by higher 2-, 5- and 10-year inflation expectations, with some citing President Joe Biden's student debt forgiveness plan as aggravating the price outlook.

But the bond yield surge was global and arguably driven by a rise in British gilts, where 2-year yields hit their highest since the crash of 2008 and the 2-10 year yield curve was more inverted than at any time since then too.

German 10-year yields also hit their highest since June, with better-than-expected German second-quarter GDP and August business surveys on Thursday.. European Central Bank policy meeting minutes are due later.

Stocks continued to hold up despite the bond jolt and U.S. futures are up before the open on Thursday, with China's latest $44 billion fiscal stimulus helping the mood in Asia too.

The dollar retreated from recent highs too, with many citing reports that China's FX regulator warned banks against selling yuan.

South Korea's central bank raised its benchmark policy rate by a quarter of a percentage point to 2.50%, resuming normal-sized 25 basis point increments after delivering an unprecedented 50-basis point hike in July.

Graphic: G7 2-yr Yields https://fingfx.thomsonreuters.com/gfx/mkt/byprjyyrepe/One.PNG

Key developments that should provide more direction to U.S. markets later on Thursday:

* U.S. Q2 revision of GDP, core PCE; weekly jobless claims; August Kansas City Fed Manufacturing Activity index

* Annual Jackson Hole central bank forum begins

* ECB minutes of July policy meeting* Earnings: Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG), Peloton (NASDAQ:PTON), Affirm, Workday (NASDAQ:WDAY), Marvell (NASDAQ:MRVL) Technology

* U.S. Treasury auctions 7-year notes; UK auctions 2025 gilts

($1 = 0.8448 pounds)

(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com. Twitter (NYSE:TWTR): @reutersMikeD)