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

By Christopher Whittall and Min Zeng Features Dow Jones Newswires

Global government bond prices fell for a third consecutive day Thursday as upbeat data in the eurozone added to concerns over a pivot toward less accommodative monetary policy in the developed world.

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The selling sent the yield on the benchmark U.S. 10-year Treasury note to the highest level in more than a month. The yield on the 10-year German government debt was set for the highest close since March. Yields on the 10-year government bonds in the U.K. and Canada reached the highest since March. Yields rise as bond prices fall.

Despite this week's rise, global government bond yields remain at very low levels. Government bonds 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, like past so-called taper tantrums that hit the U.S. bond market in 2013 and the German bond market in 2015.

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

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

In recent trading, the yield on the benchmark 10-year Treasury note was 2.263%, according to Tradeweb, compared with 2.223% Wednesday and this year's close low of 2.135% on Monday.

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

Thursday's report showed businesses and consumers in the eurozone were more optimistic in June than at any time since before the global financial crisis. The release raised fresh concerns that the European Central Bank may reduce its bond-buying monetary stimulus sooner than many investors anticipated.

The selling kicked off 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. Remarks from top officials at the Bank of England and the Bank of Canada 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.

"It is a stark reminder to market participants that the end of easy policy could be accompanied by significant indigestion," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

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.

Prices of gold futures fell Thursday as higher yields reduce the allure of the yellow metal, which unlike bonds, doesn't offer investors regular interest payments. The Dow Jones Industrial Average was down 0.7% Thursday and the tech-heavy Nasdaq was down 1.7%, though the indexes remained near a record high.

"While I'm certain the world's central banks are hoping to move gradually, the withdrawal of more than $2 trillion in annual purchases will have a significant impact on future risk-taking," said Jack Ablin, chief investment officer at BMO Private Bank.

Some stocks benefited from higher bond yields. A gauge of U.S. bank shares rose 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 is known as a steepening yield curve, which 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 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.

Some investors say the communications from central banks have at times been confusing, adding to skepticism that these higher yield 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.

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

(END) Dow Jones Newswires

June 29, 2017 14:43 ET (18:43 GMT)