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 0.3% recently at $1.1415--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 christopher.whittall@wsj.com

Global government bond prices fell for a third consecutive day as a gauge of economic confidence in the eurozone reached its highest mark since 2007, adding to concerns over a pivot toward less accommodative monetary policy in the developed world.

Selling sent the yield on the 10-year Treasury note to the highest level in more than a month. Yields on 10-year government bonds in Germany, the U.K. and Canada closed at their highest levels since March. Yields rise as bond prices fall.

Despite this week's rise, global government bond yields remain at low levels. Government bonds in the developed world have been jolted by a number of selloffs in past years, but they have failed to last long.

Investors debated whether the current selloff is a significant change in direction or just a period of volatility. The "taper tantrum" that hit the U.S. bond market in 2013 -- when the Federal Reserve signaled it would wind down its bond purchases -- and the rout of the German bond market in 2015 both were driven by investors' anxiety over monetary policy outlook.

"The central banks have provided the markets with advance notice of their intentions in hopes of minimizing disruptions, but as investors adjust to the new regime, periodic bouts of volatility could occur," said Edward Fitzpatrick, portfolio manager at J.P. Morgan Asset Management.

Erik Weisman, global bond portfolio manager at MFS Investment Management, said it would be hard to see a continued rise in bond yields without sustainably higher growth and inflation.

Higher bond yields could be self-correcting, Mr. Weisman said, in that they would push up long-term borrowing costs for consumers and businesses and undercut the growth momentum.

The yield on the 10-year Treasury note settled at 2.270%, compared with 2.223% Wednesday and this year's closing low of 2.135% on Monday.

The yield on the 10-year German bund was 0.442%, according to Tradeweb. It was up from 0.365% Wednesday and 0.249% on Monday.

Thursday's report showed the European Commission's Economic Sentiment Indicator, which aggregates business and consumer confidence, jumped to 111.1 from 109.2 in May. That release raised fresh concerns that the European Central Bank may reduce its bond-buying program sooner than many investors had anticipated.

The selling kicked off after ECB President Mario Draghi hinted Tuesday that the central bank might start winding down its monetary stimulus as the eurozone economy picks up speed. Remarks from top officials at the Bank of England and the Bank of Canada on Wednesday added to investors' angst over tighter monetary policy.

This week's selloff upended the calm tone in the bond markets that has persisted for months, underscoring bond investors' vulnerabilities to a potential shift in major central banks' policy stance.

The ECB's bond purchasing, along with that of the Bank of Japan, has been a main factor sending global bond yields to historically very low levels. A large number of government bonds in Japan and in the eurozone are trading with a negative yield, which has been driving many investors to hunt for income in the global arena and fueling many asset prices to elevated levels.

Analysts have warned that bond prices would fall when central banks remove the punch bowl, and paltry yields would leave investors who have piled into long-term government debt vulnerable to potentially steep capital losses if yields march rapidly higher.

Higher bond yields, if they persist, could cause broad ripples in global markets, some investors said.

The 10-year Treasury yield in particular is the bedrock of global finance and a benchmark for global investors to measure the relative value of assets ranging from stocks and corporate bonds to emerging market equity and fixed income assets. Concerns have been rising whether valuation on some markets such as U.S. stocks is getting stretched.

"While I'm certain the world's central banks are hoping to move gradually, the withdrawal of [stimulus] will have a significant impact on future risk-taking," said Jack Ablin, chief investment officer at BMO Private Bank.

The Dow Jones Industrial Average was down 0.6% Thursday and the tech-heavy Nasdaq was down 1.5%, though the indexes remained near a record high.

Some stocks benefited from higher bond yields. The KBW Nasdaq Bank Index rose by more than 1% on Thursday, boosted partly by a rise in the U.S. 10-year Treasury note's yield premium over the two-year note. A higher premium, known as a steepening yield curve, is a boon for banks that borrow short-term money and lend out cash longer term.

The premium had sunk this year toward the lowest level since 2007. This week's rise suggested some investors unwound the shrinking premium bets by selling long-term Treasurys and migrating the cash into short-term debt, traders said.

Write to Christopher Whittall at christopher.whittall@wsj.com and Min Zeng at min.zeng@wsj.com

Global government bond prices fell for a third consecutive day as a gauge of economic confidence in the eurozone reached its highest level since 2007, adding to investors' concerns that central banks in the developed world will pivot to less-accommodative monetary policy.

The yield on the benchmark 10-year U.S. Treasury note rose to its highest closing level in more than a month. The yields on 10-year government bonds in Germany, the U.K. and Canada all closed at the highest level since March. Yields rise as bond prices fall.

This week's selloff upended months of calm in bond markets, underscoring investors' vulnerabilities to a potential shift in major central banks' policy stance. The moves left investors and analysts debating whether the current selling marks a significant change in direction or just a bout of volatility.

Despite this week's rise in global government bond yields, they remain at very low levels. And government bonds in the developed world have been jolted by a number of selloffs in past years but they have failed to last long.

The "taper tantrum" that hit the U.S. bond market in 2013 and the rout of the German bond market in 2015 were both driven by investors' anxiety over the outlook for monetary policy.

"The central banks have provided the markets with advanced notice of their intentions in hopes of minimizing disruptions, but as investors adjust to the new regime, periodic bouts of volatility could occur," said Edward Fitzpatrick, portfolio manager at J.P. Morgan Asset Management.

Erik Weisman, global bond portfolio manager at MFS Investment Management, said he doesn't expect a sustained rise in bond yields without sustainably higher growth and inflation.

Higher bond yields, said Mr. Weisman, could be self-correcting -- pushing up long-term borrowing costs for consumers and businesses and undercutting growth.

The yield on the benchmark 10-year Treasury note settled at 2.27% on Thursday, compared with 2.223% Wednesday and above this year's closing low of 2.135% on Monday.

The yield on the 10-year German bund closed at 0.442%, according to Tradeweb, up from 0.249% on Monday.

Thursday's selling came after a report showed the European Commission's Economic Sentiment Indicator, which aggregates business and consumer confidence, jumped to 111.1 from 109.2 in May. The release raised fresh concerns that the European Central Bank may reduce its bond-buying monetary stimulus sooner than many investors anticipated.

The extended selling began earlier this week after ECB President Mario Draghi hinted Tuesday that the ECB might start winding down its large monetary stimulus as the eurozone economy picks up speed. Similar signals from top officials at the Bank of England and the Bank of Canada Wednesday added to investors' angst over tighter monetary policy.

The ECB's bond purchasing, along with that of the Bank of Japan, has been a main factor sending global bond yields to historically low levels. A large number of government bonds in Japan and in the eurozone are trading with negative yields, which has propelled a global search for income and pushed many asset prices to what some analysts describe as elevated levels.

Analysts have warned that bond prices could fall when central banks remove monetary stimulus, and paltry yields would leave investors who have piled into long-term government debt vulnerable to potentially steep capital losses if there's an extended selloff.

Higher bond yields, if they persist, could also cause broad ripples in global markets, some investors said.

The 10-year Treasury yield in particular is a bedrock of global finance, used by global investors to measure the relative value of assets including stocks.

"While I'm certain the world's central banks are hoping to move gradually, the withdrawal of [stimulus] will have a significant impact on future risk-taking," said Jack Ablin, chief investment officer at BMO Private Bank.

The Dow Jones Industrial Average fell 0.8% Thursday, and the tech-heavy Nasdaq Composite lost 1.4%, though the indexes remained near record highs.

Some stocks benefited from higher bond yields. The KBW Nasdaq Bank Index added 1.3% on Thursday, boosted partly by a rise in the U.S. 10-year Treasury note's yield premium over the two-year note. The premium had sunk earlier this year toward the lowest since 2007.

A higher premium, known as a steepening yield curve, is a boon for banks, which typically borrow short-term and lend long-term.

Write to Christopher Whittall at christopher.whittall@wsj.com and Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

June 29, 2017 17:31 ET (21:31 GMT)