(Bloomberg) -- European government bonds declined as a global selloff in fixed-income securities deepened.
While bonds around the world declined as an unexpected pick up in manufacturing in China fueled optimism about the outlook for the global economy, inactivity from Europe's two major central banks gave investors a glimpse of a post-stimulus world. The Bank of England's current schedule for purchases has run its course, with a new calendar due to be released at this week's meeting, while public holidays on Tuesday mean the European Central Bank is likely to reduce its own purchases, according to DZ Bank AG.
Spain's sovereign debt led declines, pushing the yield on 10-year bonds to a four-month high, while those in the U.K. approached the most since the nation voted to leave the European Union in June. Global bonds had their worst month since September 2014 in October, according to the Bloomberg Barclays Global Aggregate Index, sparked by investor concern that central banks are preparing to gradually reduce stimulus.
“The ECB will most likely pause its asset purchase program, as some local central banks are on holiday,” said Christoph Kutt, head of rates strategy and sovereign credit at DZ Bank in Frankfurt. Fixed-income markets have also been under pressure as the market “realizes that central banks won't add stimulus.”
Spain's 10-year bond yield climbed nine basis points, or 0.09 percentage point, to 1.29 percent as of 4:02 p.m. in London, the highest since June 29. The 1.3 percent security due in October 2026 fell 0.855, or 8.55 euros per 1,000-euro ($1,105) face amount, to 100.085.
Yields on similar-maturity German bunds increased two basis points to 0.19 percent, and those on 10-year gilts rose four basis points to 1.28 percent.
Policy Decisions
Speculation is mounting that central banks are moving away from loose monetary policies. The Bank of Japan and the Reserve Bank of Australia both opted to keep interest rates unchanged on Tuesday. The probability of a U.S. rate increase by December has climbed to 73 percent, fed fund futures indicate, from 59 percent at the end of September. The Fed is due to announce its latest policy decision on Wednesday.
Meanwhile, a report last week showed Britain's economy grew faster than analysts forecast since the nation voted to leave the European Union in June, causing traders to shift their bets away from a BOE rate cut this year.
In the euro zone, data last week showed German inflation accelerated at the fastest pace in two years in October, adding to signs that the ECB's efforts to avoid deflation are succeeding. Speculation that the central bank will taper its 1.7 trillion-euro plan, which is scheduled to run until at least March 2017, helped trigger a slide in the region's debt last month.
--With assistance from Marianna Aragao To contact the reporters on this story: Anooja Debnath in London at adebnath@bloomberg.net, Charlotte Ryan in London at cryan147@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins
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