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World bonds: rising oil to keep up pressure on yields

LONDON: A surge in oil to nine-year highs and similar moves in other major commodities will keep the pressure on bond markets and could send yields back to highs seen in January, analysts said on Friday.

The continued rise in oil prices has fueled fears of higher inflation, damaging sentiment in already jittery bond markets. Strategists said the move has caught many fixed-income investors off guard because it was assumed oil prices would plateau.

"This is one of the most important threats to the bond market that it's seen of late," said Adam Beaudin, international bond market strategist with Credit Suisse First Boston in Zurich.

"If oil surprises us and continues to go up above $30 (per barrel) and stays there, this could certainly raise doubts about how quickly the CPI (consumer price index) is going to peak, and be an additional reason for central banks to be more aggressive," he said.

RISING GLOBAL GROWTH

Oil futures sped to $28 a barrel for the first time in nine years on Friday after the International Energy Agency warned that a decline in already low petroleum inventories was accelerating.

The move comes amid a general rise in commodity prices on the back of a recovering world economy. The benchmark Commodity Research Bureau index, which tumbled during the series of emerging market crises which began in Asia in 1997, closed on Thursday at its highest level since July, 1998.

"As long as the global environment remains positive, and that we believe, there's clearly the potential for commodities to drive higher," said Guillaume Salomon, fixed-income strategist with Warburg Dillon Read.

"If this type of price move continues in commodities, it will impact CPI (consumer price indices), it will impact PPI (producer price indices), and that has a negative bearing for bonds," he added.

If inflation does turn higher, economists said it will prompt central banks to extend the rate hike cycles they began last year. The U.S. Federal Reserve and European Central Bank (ECB) were expected to add to the 25-basis point rate hikes they made earlier this month even before the latest jump in oil.

WAGES WATCHED CLOSELY

Banque Nationale de Paris fixed-income strategist Juli Collins-Thompson said the situation was especially sensitive in Europe, where ECB policymakers have warned it is essential rising inflation does not trigger excessive wage claims.

"This is one of the big concerns in Europe right now, that wage rounds will be biased higher by the fact that commodity prices are going up. If that follows with higher wages, then it's even more negative news in terms of the inflation outlook," she said.

Salomon and Beaudin said there is a risk the bond market could see yields return to the peaks reached in late January before news of a buyback plan by the U.S. Treasury provided relief. Poor results for the U.S. quarterly refunding this week have only added to the bad mood.

Salomon forecast the U.S. 10-year bond yield to climb to 7.125 percent in the next six months from 6.64 percent now. It rose as high as 6.79 percent in January.

He also saw the euro zone benchmark 10-year Bund yield climbing to 5.85 percent from the current 5.6 percent in the next six months. The yield touched 5.68 percent in late January.

BNP was less bearish, forecasting the U.S. 10-year yield would fall to 6.6 percent in the next three months and reach 6.4 percent in six months. They saw the 10-year Bund yield rising to 5.7 percent in three months and remaining around that level in six months.-Reuters