Economic fundamentals in focus

Higher-than-expected inflation data in some markets seems to have encouraged bond markets to take a more defensive stance.

Whereas bond markets had mainly been driven by risk-aversion and risk-off themes (e.g. hurricane season, North Korea) in previous weeks, economic fundamentals seem to have moved into investor focus again in the past few days.


Higher than expected consumer price inflation (CPI) data in China (1.8% YoY vs. 1.6% expected), together with several European inflation rates coming in at the high end of expectations, seem to have encouraged bond market participants to take a more defensive approach. 10-year government bond yields in Europe have risen between 6 bps and 23 bps. Yields in the major Eurozone bond markets were up about 10 bps, with 10-year Bund yield rising to about 0.4%.

“The strongest increase occurred in the UK market, where 10-year Gilt yields reached 1.2%.”

UK CPI data published on Tuesday – ahead of Thursday’s Bank of England (BoE) monetary policy meeting – revealed a rather higher than expected August CPI increase of 2.9% YoY, and a core rate of 2.7%.


The BoE clearly took notice of these recent trends and, while noting that Brexit still posed significant risks to the economy, noted in the minutes to Thursday’s meeting that the data set compared to the previous meeting pointed to a “slightly stronger picture than anticipated”. In general the minutes adopted considerably more hawkish tone and hinted that rates could rise within months.


Although most inflation figures in Europe are still far from indicating a solid upward trend in inflation, they can be seen as a sign of the effectiveness of the current monetary policy stance of the ECB. And, although individual data points are certainly not a trigger for monetary policy changes, they are certainly noticed by bond market participants.       

UK inflation and government bond yields

Source: Bloomberg Finance L P, Deutsche Bank AG. Data as of September 13, 2017.

Markus Müller
Global Head
CIO Office
Source: CIO Bulletin, September 15, 2017