BOND REPORT: Global Bonds Sell Off As Central Banks Signal End To Easy-money Era

By Sunny Oh and Rachel Koning Beals Features Dow Jones Newswires

10-year Treasurys added 14 basis points

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A global bond selloff continued on Thursday, heaping pain on bondholders and driving some yields to their highest levels in more than a month, as investors digested messages from central banks this week on rolling back easy-money policies.

The U.S. followed the lead of rising yields elsewhere, although the moves for the Treasury market were lagging behind their international counterpart. With global markets so interconnected, higher yields outside of the U.S could prompt foreign buyers to rebalance their portfolios in favor of far-flung bond markets, if only to avoid overexposure to U.S. government paper.

The yield for the benchmark 10-year Treasury note jumped 14 basis points in the last three days, putting this week on track for the largest weekly gain in almost four months.

Although market participants have largely ignored the Federal Reserve's warnings that it intends to stock to its plan for raising interest rates, it eventually took several central banks to make concerted comments on opening the door to tighter policy to spook bond investors.

"The Fed has finally driven home its point to markets," said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, in a note to clients.

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Read:The 'tightening slugfest' has started--and markets don't know what's about to hit 'em (http://www.marketwatch.com/story/the-tightening-slugfest-has-started-and-markets-dont-know-whats-about-to-hit-em-2017-06-29)

Others felt investors of U.S. government paper had overreached.

"We were bottoming out in terms of expectations for the [Treasurys] market over the last week, the market had priced out the Fed entirely, and priced out the ECB," said Bruno Braizinha, a fixed-income strategist at Société Générale. "The level of pricing we had was complacent."

Bonds were volatile midweek after speculation grew that the ECB would unwind its EUR2.3 trillion ($2.6 trillion) bond-buying program. But a senior ECB official said market participants had misinterpreted ECB President Mario Draghi's comments on Tuesday as hawkish. Momentum for monetary tightening from the ECB is nonetheless building up, with the European Commission's economic sentiment indicator hitting its highest levels since August 2007 (https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/latest-business-and-consumer-surveys_en), a sign that May's weak inflation reading could prove a minor blip.

The yield on Germany's 10-year government bond rose as high as 0.44% on Thursday, its highest level in about a month, and considerably higher from where it started the week at around 0.25%, according to FactSet data. French 10-year government bonds followed closely, rising 7.8 basis points to 0.80%.

See: What happened to Mario Draghi's silver tongue? (http://www.marketwatch.com/story/what-happened-to-mario-draghis-silver-tongue-2017-06-28)

Other central bankers appeared to join the bandwagon for tightening policy. Earlier this week, Bank of England Gov. Mark Carney said a broadening global economic recovery could make an interest-rate hike "necessary." (http://www.marketwatch.com/story/boe-chief-carney-hints-at-rate-rise-2017-06-28) On the same day, Bank of Canada Gov. Stephen Poloz said falling levels of slack in the economy could warrant a re-evaluation of its monetary policy, a sign investors said the bank was moving closer to first rate hike in close to seven years, in an interview with CNBC.

"A coordinated push is a new development that may remain a theme for the remainder of the summer," said Marvin Loh, a senior fixed income strategist at BNY Mellon.

The 2-year gilt yield touched 0.36% in the first hours of trading on Thursday--its highest level since October--leaving the policy-sensitive benchmark sitting above the current base rate of 0.25% set by the Bank of England for the first sustained period since Britain voted to leave the EU last June.

Some investors have likened this week's moves to the taper tantrum in 2013, when former Fed Chairman Ben Bernanke sparked panic in bond markets after hinting that the Fed would slow down its $85 billion per month of quantitative easing. But others point out the selloff's strength has garnered so much attention partly because markets have been the calmest they've been in years.

"The recent moves are remarkable, but only remarkable in recent history, implied volatility in [Treasurys] is still low," said Putri Pascualy, managing director at PAAMCO, an investment firm.

Volatility for Treasurys according to the Bank of America Merrill Lynch's MOVE index rose to 52.5 by Thursday noon, but had skimmed close to 50 at the beginning of the week, its lowest since 2013.

The 10-year benchmark note's yield climbed 4.8 basis points to 2.270%. The yield for the two-year Treasury note rose 2 basis points to 1.373%, while the 30-bond yield added 4.2 basis points to 2.820%. Yields move inversely to prices; one basis point is one hundredth of a percentage point.

Back in the U.S., weekly jobless claims from the Labor Department rose 2,000 to 244,000 (http://www.marketwatch.com/story/jobless-claims-edge-up-by-2000-to-24400-2017-06-29)but the four-week jobless claims average fell 2,750 to 242,250, a sign that labor slack could be shrinking. First-quarter gross domestic product was revised higher to 1.4% (http://www.marketwatch.com/story/poor-start-to-2017-not-really-first-quarter-gdp-raised-again-to-14-2017-06-29).

St. Louis Fed President James Bullard said the Fed would require strong data to justify tightening monetary policy alone without similar moves from global central banks, according to Reuters (https://www.reuters.com/article/us-usa-fed-bullard-idUSKBN19K2JS). He is not a voting member of the Fed's rate-setting board in 2017.

(END) Dow Jones Newswires

June 29, 2017 16:58 ET (20:58 GMT)