Inflation alarm after oil surge

Inflation will be back at center-stage for financial markets next week with oil’s surge past $70 a barrel and rising bond yields rekindling worries about long-term borrowing costs and the fragile housing sector.

A series of inflation readings for May in the United States, Britain and the euro zone will focus investors’ minds after oil prices jumped over 20 percent last month and bond markets were spooked enough to lift 10-year U.S. Treasury yields to 4 percent — an eight-month high.
“Against an increasing global oil and agricultural commodity price backdrop, we see a reasonable chance that market headline inflation concerns maintain in the coming weeks,” Barclays Capital said in a recent note to clients. Economic data has strengthened investors’ conviction that economic recovery is taking hold, and that has driven rallies in equities, commodities and riskier emerging markets assets.

This is thanks to governments’ stimulus measures and unprecedented quantitative easing programs by central banks which have led to rock-bottom interest –and mortgage — rates.

But the rise in longer-dated Treasury yields, linked to huge issuance volumes and some doubts about demand for U.S. assets, is causing fears for the fragile recovery as it heralds higher borrowing costs down the line.

Reuters