What's causing bond market turmoil?

Jitters in the US bond market have sent the yield on the 10yr gilt to a ten-year high and wiped 2-4% off major equity markets. So what caused the fright - and what do bond market woes mean for other asset classes?

Government bond markets "are supposed to be the accountants of the financial world: calm and steady", says The Economist. But recently, they have been frightening the horses. On 7 June, the yield on the ten-year US Treasury bond moved above 5.05%, breaking a downward trend that had persisted since 1987 amid growing confidence that inflation had been vanquished. That prompted further bond selling, sending the yield to 5.3%; three weeks ago it was 4.7%. Bonds guru Bill Gross said he is now a "bear market manager" after 25 years as a staunch bull.

The US jitters sent Government bond yields up in the UK and Europe, with ten-year gilt yields hitting a ten-year peak of 5.49%. Gilts have dropped by 4.5% since January "a significant correction for these normally stable investments", say Henderson Global Investors. The bond slide wiped around 2%-3% off major equity markets, although they have since largely recovered as yields have stabilised.

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