Global Bond Selloff Deepens Amid Hints at End of Stimulus--Update

By Christopher Whittall Features Dow Jones Newswires

Global government bond prices slumped for a third straight day Thursday and the dollar fell, as investors continued to anticipate the end of the central bank easy-money policies that have dominated markets in recent years.

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But investors debated whether the current selloff is a significant change in direction or just a period of volatility, like past so-called taper tantrums.

For now, investors are selling in moves that could have big consequences across markets and for local economies should they continue.

They dumped U.S. Treasurys and European bonds Thursday morning, sending yields on many securities to their highest levels in more than a month. Meanwhile, the euro, British pound and Canadian dollar logged further gains against the U.S. dollar after rising sharply earlier this week. The WSJ Dollar index is now below the level it was before Donald Trump's November election.

Many investors believe yields could still have a long way to rise, given how far they have fallen in recent years and the latest buoyant economic data. Rebounding economic growth suggests central banks will start unwinding the stimulus that has underpinned markets since the financial crisis. Despite the recent pickup, the yield on the 10-year Treasury note is still less than a percentage point higher than its all-time low of 1.366% reached last July.

Still, others argue that structural changes mean bonds will continue to find buyers, with the West's aging populations putting money into pension funds and insurance companies that need a reliable stream of income. Some investors also doubt if central banks, particularly in Europe, are ready to turn off the taps given low levels of inflation.

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"The jury is still out," said Stefan Isaacs, deputy head of retail fixed interest at M&G Investments.

Mr. Isaacs is betting that bond yields will rise, arguing that in Europe, in particular, they are too low given the economic outlook. That said, he believes yield-hungry investors like pension funds will step in if yields move markedly higher.

"There are other forces at work [in the market] that historically haven't been as dominant. I don't think we're going to take bond yields back to the levels that we assumed were normal precrisis," he said.

If sustained, the spike in yields and currency moves would ripple across markets and through local economies. Rising government bond yields tend to make borrowing more expensive for companies and consumers, long used to cheaper finance. A stronger euro may hurt European exporters, making their international revenues worth less and their products less competitive.

Low bond yields have also pushed investors into stocks at elevated valuations, given the skinny returns from debt. Higher yields will likely weigh on so-called bond proxy stocks such as utility companies, which offer investors a steady stream of income through dividends and whose shares have fallen this week. Bank stocks have risen, as lending becomes more profitable when rates are higher.

Thursday's moves follow comments from some of the world's largest central banks pointing to a reduction of the extraordinary stimulus measures to support their economies following the financial crisis.

The euro rose for a third straight day against the dollar. It was up 0.2% recently at $1.397--hovering around levels not seen in over a year. The British pound and the Canadian dollar rose against the buck after both notching large gains on Wednesday, up 0.3% and 0.1% respectively recently. The dollar is under pressure as expectations for rate rises in other countries boost their currencies. Rates rise often bring more money into a country as investors look for the extra yield, that boosts the local currency.

The yield on the 10-year Treasury note rose to 2.276% from 2.223% on Wednesday, according to Tradeweb, on track for its highest close in over a month. Eurozone and U.K. government bond yields also climbed. Still, long-dated Treasury and European bond yields are still trading lower than levels reached earlier in the year, showing the current rise has come from a low starting point.

The market moves started on Tuesday when European Central Bank President Mario Draghi acknowledged a "strengthening and broadening" economic recovery in the eurozone.

Many investors interpreted that as a sign the central bank was preparing to trim its EUR2.3 trillion ($2.62 trillion) bond-buying program, which has boosted asset prices and helped push down the euro in recent years. Speaking Wednesday at the same conference in Portugal, the chiefs of the Bank of Canada and Bank of England suggested they'd be reducing monetary stimulus in the form of raising interest rates.

Still, some investors say the communications from central banks have at times been confusing, adding to the skepticism that these moves will be long lasting.

Even this week, top ECB officials have left some investors with mixed impressions about when it will reel in its massive bond buying, which is currently slated to continue at least until the end of 2017. BOE chief Mark Carney said last week now wasn't the time to hike U.K. rates but hinted in a speech Wednesday that the time could in fact be near.

"The members of the central banks are not all singing from the same hymn sheet," said Steven Saywell, global head of foreign-exchange strategy at BNP Paribas SA.

"I think there will be volatility" in the coming days, said Mr. Saywell, as investors digest mixed signals from some of the world's largest central banks.

The gyrations mark a sharp turnaround for developed market bonds. The yield on the 10-year Treasury note fell to 2.135% on Monday--its lowest level since November--amid expectations that weaker than expected inflation in much of the developed world would deter central bankers from tightening monetary policy too quickly.

This week's moves recall other so-called taper tantrums, when bond yields ground higher over a period of several weeks or even months as investors tried to pre-empt central banks' scaling back their stimulus measures by selling bonds.

In 2013, the yield on the 10-year Treasury note jumped and emerging markets fell after the Federal Reserve raised the prospect of slowing its bond purchases, which eventually ended in October 2014.

But yields have risen before only to fall back again. The 10-year Treasury yield briefly rose above 3% in late 2013, but hit a record low of 1.366% last July.

Write to Christopher Whittall at

(END) Dow Jones Newswires

June 29, 2017 09:03 ET (13:03 GMT)