Bond markets: The threat from rising rates

In the first week of January, 10-year US treasuries, which had traded in a range between 1.6% and 1.8% since the summer of 2012, sold off suddenly and sharply, with yields rising to 1.92% in a single day, their highest level since May 2012. The cause was an innocuous-looking detail in the minutes of the Federal Open Markets Committee meeting from December revealing that several members “thought that it would probably be appropriate to slow or stop [asset] purchases well before the end of 2013, citing concerns about financial stability”.

In Europe, there was a similar reaction at the start of February when two-year to five-year European rates shot up by 40 to 50 basis points on the news of larger than expected repayment by European banks of long-term refinancing operation funding from the European Central Bank.