Bonds remain under pressure as European stocks reverse losses

Government bonds remained under pressure on Thursday and the dollar held steady near its highest levels in more than a year as European stocks reversed early losses. The pound headed for its biggest three-day drop in nearly two years, under pressure from a selloff in global bonds that has hit gilts especially hard, driving yields to 16-1/2-year highs, as concern mounts about Britain’s finances.

Sterling was last down 0.5% at $1.230, having touched its lowest since November 2023 earlier in the day.

Concern about rising inflation, reduced chances of a drop in interest rates, uncertainty over how US president-elect Donald Trump will conduct foreign or economic policy, and the prospect of trillions of dollars in extra debt sales have sent bond yields soaring around the world this week.

This took European stocks lower at the open but they reversed to trade up 0.36% as of 1315 GMT.

The benchmark 10-year US Treasury yield eased to 4.6526% from an overnight peak of 4.73%, which was the highest level since April 2024.

“This rout is not a UK but a global phenomenon. Sovereign debt is the elephant in the room. Will the UK achieve the growth we’d all like to see? The markets are not convinced,” said Russ Mould, investment director of AJ Bell in London.

The US dollar index, which gauges the currency against sterling, the euro and four other major peers, edged up to 109.09, sitting not too far from the highest level since November 2022 of 109.54, reached a week ago.

 The latest boost for the dollar and US Treasury yields follows recent signs of resilience in the US economy and inflation, which prompted markets to reduce expectations for Federal Reserve rate cuts this year.

Minutes of the Fed’s December policy meeting, released on Wednesday, showed officials were concerned that Trump’s proposed tariffs and immigration policies may prolong the fight against inflation. Selling in Treasuries on Wednesday accelerated after a CNN report that Trump was considering declaring a national economic emergency to provide a legal justification for a series of universal levies on allies and adversaries.

Markets are fully pricing in just one 25-basis-point US rate cut in 2025, and see around a 60% chance of a second.

All that has combined to make global stock market sentiment fragile, and Asian equities closed lower on Thursday. Chinese stocks slipped as official data underscored persistent deflationary pressure despite fresh government consumption stimulus, intensifying a scramble for offshore assets, while Hong Kong’s shares closed at a one-month low. Mainland Chinese blue chips and Hong Kong’s Hang Seng ended down 0.3% and 0.2% respectively. Japan’s Nikkei closed down almost 1%, as investors sold stocks to book profits after a recent rally, with chip-related shares dragging on the index the most. US stock markets are closed on Thursday to mark the funeral of former US president Jimmy Carter. US bond markets close earlier at 1900 GMT.

On Friday, the closely watched US monthly payrolls report will provide clues on the Fed policy outlook. China’s yuan steadied near a 16-month low against the dollar as the nation’s central bank announced a record amount of offshore yuan bill sales to support the currency.

“This move underscores Chinese policymakers’ unwavering preference for currency stability,” said Shoki Omori, a strategist at Mizuho Securities, predicting the Chinese currency will firm to 7.22 per dollar by year-end. Oil prices rose slightly on Thursday as investors factored in firm winter fuel demand expectations despite large US fuel inventories and macroeconomic concerns. Brent crude futures were up 38 cents at $76.54 a barrel by 1320 GMT. US West Texas Intermediate crude futures gained 32 cents, or 0.4%, to $73.64. Gold prices were up 0.3% to $2,670.00, after earlier touching $2,678.33, the highest since Dec. 13.

Leading cryptocurrency bitcoin tumbled 1.73% around $92,810, following a two-day slide of 7%. Oil prices rose slightly on Thursday as investors factored in firm winter fuel demand expectations despite large US fuel inventories and macroeconomic concerns. Brent crude futures were up 35 cents, or 0.5%, at $76.51 a barrel by 1246 GMT. US West Texas Intermediate crude futures gained 30 cents, or 0.4%, to $73.62. Both benchmarks fell more than 1% on Wednesday as a stronger dollar and a bigger than expected rise in US fuel stockpiles pressured prices.

“The oil market is still grappling with opposite forces - seasonal demand to support the bulls and macro data that supports a stronger US dollar in the medium term ... that can put a ceiling to prevent the bulls from advancing further,” said OANDA senior market analyst Kelvin Wong.

JPMorgan analysts expect oil demand for January to expand by 1.4 million barrels per day (bpd) year on year to 101.4 million bpd, primarily driven by increased use of heating fuels in the Northern Hemisphere. “Global oil demand is expected to remain strong throughout January, fuelled by colder than normal winter conditions that are boosting heating fuel consumption, as well as an earlier onset of travel activities in China for the Lunar New Year holidays,” the analysts said.

The market structure in Brent futures is also indicating that traders are becoming more concerned about supply tightening at the same time demand is increasing.

Agencies