The surge in bond yields that is sending government borrowing costs higher will only stop after a prolonged slump in stock markets, analysts at Barclays have warned.
Bond markets have rebounded slightly from a rout that sent UK 30-year gilt yields to their highest level since 1998 this week.
Stocks have struggled under the weight of soaring yields in the bond market. Yields – the return paid to buyers of the bonds – rise as the prices of bonds fall as investors demand higher returns.
Higher yields undercut stock prices by pulling investment away from stocks and into bonds as the returns appear more lucrative. Higher coupons also hit corporate profits and government debt by making borrowing more expensive.
Barclays analyst Ajay Rajadhyaksha indicated that the bond rout may not be over until a repricing of stocks, dubbed “risk assets”.
He said: “There is no magic level of yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally.
“In the short term, we can think of one scenario where bonds rally materially. If risk assets fall sharply in the coming weeks.”
He added: “The magnitude of the bond sell-off has been so stunning that stocks are arguably more expensive than a month ago, from a valuation standpoint.
“We believe that the eventual path to bonds’ stabilising lies through a further re-pricing lower of risk assets.”
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