Bond yields sharply higher

Bond markets capitulated on Friday – with yields backing up sharply – at the end of a week that saw a renewed increase in oil prices, rising inflation in the US (consumer, producer and import price inflation all came in ahead of forecasts in April), and a hardening of central back rate hike expectations, notably in the case of the Fed with a 25bps increase in the policy rate now more than fully priced in by March of next year. In FX, the dollar advanced on the week, while sterling underperformed amid the turmoil engulfing the Labour Party in the UK. The pound shed about 3 cents against the US currency and around a penny against the euro, kicking off this morning trading at around $1.3350 and £0.8715 respectively. The single currency fell by almost 1.5 cents on the week against the dollar, currently trading just below $1.1650. Meanwhile, Donald Trump has warned that the “clock is ticking” for Iran , which is weighing on markets generally this morning.

Government bond yields rose very sharply on Friday led by the long-end of curves, with US and German 10-year yields increasing by 12-13bps and equivalent UK yields about 18bps higher on the day. Over the week, UK yields rose by 26bps, which was almost matched by a 23bps increase in US yields, while German yields  were around 17bps or so higher. Rising bond yields weighed on equity markets at the end of the week, with US and European stocks shedding around 1% and 1.5% respectively on Friday.

ECB member Stournaras says “a significant but temporary excess over the (2%) inflation target would mean a measured adjustment of monetary policy in a more restrictive direction in the near future, in order to limit the intensity of second-round (price) effects, without disproportionately affecting economic activity,” suggesting he favours an increase in interest rates at next month’s meeting.

For the week ahead, Finance Ministers and central bankers from the G7 meet today and tomorrow, while there’s a heavy schedule of UK economic data due including the Q1 2026 labour market report tomorrow (Tuesday), CPI and PPI inflation for April on Wednesday, and consumer confidence (May) and retail sales (April) on Friday. Meanwhile, flash PMIs for May are published in the main economies on Thursday, which will provide an update on how they are faring amid continuing high oil prices and the ongoing uncertainty resulting from the conflict in the Middle East.