View From City Road: No end of bad news on bonds

Those who thought they had seen the worst of the bond market crash are in the process of being sadly disillusioned. To the fury of the Government, which is having to pay through the nose for its long-term money, the second leg of this year's bear market now looks to be well-entrenched. Yesterday saw another symbolic barrier breached, as the yield on the 10-year benchmark gilt topped 9 per cent for the first time since late 1992 - a rise of nearly 3 percentage points from its low point.

The underlying themes remain the same; worries of resurgent inflation in the United States, rising interest rates in Europe and a continued supply of bonds from governments that have yet to get their borrowing under control.

The bond market malaise in turn continues to cast a baleful shadow over the equity markets. The FT-SE 100 share index shed another 40 points yesterday. Wall Street lost 67 points, and is uncomfortably overvalued in the eyes of a growing number of analysts. All the talk is of worse to come for both bonds and shares.

It may be some time before the mood begins to turn. Stability in the US Treasury market will have to wait for clearer evidence that the US recovery is losing steam and greater confidence that the Federal Reserve has raised interest rates far enough to choke off resurgent inflationary pressure. Neither is yet in sight.

Stability in US Treasuries is in turn the first condition for a recovery in European bond markets, which have failed to decouple themselves from trends across the Atlantic. In the longer term worries will remain in Europe until the interest-rate cycle has turned in Germany. At the moment investors are being bombarded with divergent predictions from analysts and economists, which is only fuelling the sense of uncertainty.

With the first rise in German rates perhaps six months away, a run of bad news on US inflation looming and the European Union shaking its head over the size of government borrowing, the markets need some unexpectedly good news to pull them out of the present malaise.