Monday 10 October 2016 3:32 pm

Bonds losing appeal as inflation set to pounce

Yields on UK government debt have hit their highest level since the EU referendum as inflation fears grow and the pound remains under pressure.

The benchmark 10-year bond now comes with a yield of more than one per cent in the UK, after hitting a record low of 0.52 per cent over the summer as investors scrambled into the safety of government debt.

Borrowing costs in both the Eurozone and the US have also climbed higher, prompting analysts to once again call the top of the bond market.

"This year should mark the end of global deflation worries, as headline inflation gradually recovers to near-target levels in the US and the UK" said JP Morgan's Stephanie Flanders.

BMI Research, part of the Fitch Group, added: "We continue to see higher inflationary pressures building across developed markets, which we expect to result in higher bond yields in the Eurozone, the UK and Japan."

Sterling's dramatic fall has sent expectations for inflation in the UK surging to their highest in three years as consumers expect imported goods to become more expensive. In turn, markets expect faster price rises to weaken the prospect of another interest rate cut in the UK and prompt investors to demand stronger returns – all of which will push up yields in the UK.

Read more: Why did the flash crash happen?

Talk of quantitative easing tapering by the European Central Bank and the prospect of the next rate rise in the US have all prompted mini sell-offs. Moreover, as the sharp drop in the price of oil falls out of the year-on-year calculations, inflation will push up naturally.

German 10-year yields are also back in the black at 0.05 per cent after languishing below zero for much of September, and US treasuries are also climbing higher.

JP Morgan's Flanders added: "Central banks are now very focused on the negative side effects of super-low long-term interest rates, so I don't think investors should be betting on sovereign yields in the Eurozone or Japan slipping further and further into negative territory."