Meanwhile, Bank of England governor Mark Carney unsettled the gilt market by saying he was prepared to raise interest rates if business activity in the UK increased.
Senior figures at the ECB sought to play down Draghi’s comments the following day, but it was not enough to quell the sell-off in government bonds across Europe.
Royal London Asset Management head of fixed income Jonathan Platt said markets had been caught unprepared for a tightening of monetary policy, but admitted the scale of the sell-off had taken him by surprise.
He said: “It has been clear for a long time that the easy monetary policy which had anchored government bond yields could not last forever, the question for markets was not if but when.
“But given that recent wage growth remains soft and unsecured lending looks likely to be squeezed, the Bank of England is unlikely to apply further pressure to UK consumers.
“Therefore, where appropriate we’ve taken advantage of this week’s weakness to selectively purchase assets which we feel may have been over-sold.”
Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, said with broad financial conditions improving and three rate hikes in the past six months – thanks to a softer US dollar, higher equity prices and tighter credit spreads – he would not be overly surprised if the Fed used its Federal Open Market Committee meeting in July to announce the start of tapering, especially if labour market data surprises to the upside.
He added: “It is widely believed that this is more likely in September, but with most of the details already pre-announced to the market in June to a relatively muted market response, we do not believe it will be necessarily imperative to start this at a quarterly meeting when a Janet Yellen press conference is scheduled.”
