Bonds selloff pressures Europe, oil climbs further

By Iain Withers and Dhara Ranasinghe

LONDON, Aug 19 (Reuters) - European government bond yields rose to new multi-year highs on Wednesday as a global selloff deepened on fears of swelling sovereign debt, while oil futures gained for a fourth straight day on receding prospects of a deal to end the conflict in the Middle East. 

European stocks edged lower, while Wall Street futures pointed to modest falls, after stocks across Asia fell on concerns about the outlook for semiconductor companies. South Korean shares closed nearly 6% lower, posting their biggest one-day drop in three weeks.

Long-term borrowing costs from the U.S. to Germany and Japan have soared recently as investors fret over ballooning government debt and high inflation, in part driven by the Iran war pushing up oil prices.

German 10- and 30-year Bund yields rose to fresh 15-year highs, with 10-year borrowing costs last trading just above 3%, while French 10-year yields rose to their highest levels in 18 years in a sign of growing unease across some of the world's biggest government bond markets..

The yield on the U.S. long bond steadied around 5.28% on Wednesday after hitting its highest in nearly 20 years on Tuesday, at nearly 5.34%.

Yields go up when bond prices go down, and the selloff matters because long-end sovereign yields act as an anchor for the price of nearly every other asset in financial markets, including mortgage rates.

“If you combine a sticky inflation environment and excessive government spending, then the natural move for bond yields is higher," said Jason Da Silva, director of global investment strategy at Arbuthnot Latham, adding that he expected more frequent bouts of pressure from bond investors.

“I think this is going to be the norm going forward. There are no aggressive measures by any Western governments to curb spending."

A rise in Japan's benchmark 10-year bond yield toward 3%, touching a three-decade high, is also a warning sign for global debt markets that for years have depended on low Japanese rates driving a constant flow of Japanese investment abroad.   

"There is a narrative of are we going to have continued higher-for-longer inflation and what does that mean for longer-term interest rates?" said Neil Fisher, investment specialist at St James's Place.

"Then you have a narrative around how sustainable is some of this long-term government debt in the UK and Europe, in the U.S. as well?"

The inflation outlook also remains troubling with few signs of progress toward a deal to open the Strait of Hormuz. Oil futures were last up around 1% on the day. [O/R]

Later on Wednesday the U.S. Federal Reserve releases minutes from the July meeting where it left rates on hold, but Chair Kevin Warsh spooked markets by offering few clues about whether and how the central bank might respond to persistent inflation.

The U.S. is also set to sell $16 billion in 20-year debt.

"Governments face a real choice between spending discipline and materially higher borrowing costs, and markets will keep testing which one they choose," said Nigel Green, CEO of financial advisory deVere Group.

STOCKS WOBBLE, DOLLAR STEADIES

In China, shares in the world's biggest humanoid-robot maker, Unitree, soared 460% on its debut, a listing that was more than 8,000 times oversubscribed by retail investors.

The bond selloff and reports that Anthropic's annual revenue run-rate topped $65 billion at the end of July, which was behind some market hopes, were triggers for selling chipmaking shares.

The risk-averse mood has lent a little support to an otherwise softening dollar in currency markets, though moves were small. The U.S. dollar index was last down 0.3% at 99.382. [FRX/]

The Canadian dollar rose a tad after U.S. President Donald Trump paused imposing a 50% tariff on Canadian goods for three days, saying the countries had reached a deal. [CAD/]

The euro edged 0.25% higher to just over $1.16 and the yen traded at 159.15 per dollar, just in the shadow of 160 — a level investors see as a potential trigger for another round of official intervention. 

Earnings at Lowe's, Target and TJX are due later on Wednesday, which will be closely watched after softer-than-expected U.S. retail sales data landed last week. 

British inflation rose in July by 2.9%, data showed, in line with economist forecasts as it was pushed higher by an increase in household energy bills.

(Reporting by Iain Withers and Dhara Ranasinghe, Additional reporting by Tom Westbrook; Editing by Shri Navaratnam, Sam Holmes, Elaine Hardcastle)