Global Bonds Sell Off, Deepening Losses -- Update

By Min Zeng Features Dow Jones Newswires

Investors around the world sold government bonds anew Thursday, as anxiety deepened that central banks are moving toward reducing support from monetary policy.

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The center of the selling remains in the eurozone where government bond yields jumped broadly. The yield on the 10-year German government bond, the benchmark for the eurozone's debt markets, rose to the highest level since early 2016. The selling pressure spread to the U.K., the U.S., Canada, Denmark and Sweden.

The yield on the benchmark U.S. 10-year Treasury note, a bedrock for global finance, settled at 2.369%, compared with 2.334% Wednesday. It marked the yield's highest closing level since May 11.

Yields rise as bond prices fall.

Driving Thursday's selling in the bond market was the minutes from the European Central Bank's recent policy meeting. The release showed ECB policy makers discussed how to signal their increasing confidence in the eurozone economy at their June policy meeting, and considered dropping a pledge to accelerate their massive bond-buying program.

The weeklong price declines broke the calm tone in the bond market that had persisted for months, highlighting investors' vulnerabilities to a sudden shift in sentiment.

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The 10-year Treasury yield had fallen to 2.135% on June 26, the lowest closing level this year. Since then, the yield has surged more than 0.2 percentage point.

The yield on the 10-year German bund has more than doubled since June 26 and traded at 0.569% Thursday afternoon, the highest close since January 2016, according to Tradeweb.

"Sentiment for bonds has gone from the rooftop to the basement," said Jim Vogel, market strategist at FTN Financial.

Central banks' easy-money policies, highlighted by large bond purchases, have played a big role in driving down global bond yields to historically low levels following the financial crisis. The buying has been a boon for investors benefiting from a rise in bond prices.

The tradeoff is that any upset to the narrative of ultra-loose monetary policy would rattle the bond market. Paltry bond yields mean returns from bonds easily get wiped out especially when yields rise rapidly.

Anxiety over central bank policy outlook rose in the bond market last week after hawkish comments from policy makers at the ECB, the Bank of England and the Bank of Canada. The Federal Reserve's minutes Wednesday afternoon suggested U.S. policy makers may start paring back its large bond holdings in coming months.

"The bond market has priced for very low yields for a long period of time driven by monetary stimulus, which makes it vulnerable when sentiment shifts," said Nigel Jenkins, senior portfolio manager at Payden & Rygel in London.

Fresh new debt sales from Spain, France and the U.K. added to the bond market's selling pressure Thursday, said traders. A monthly gauge of the U.S. service sector Thursday continued to point to solid expansion, offsetting a separate report showing the pace of job growth in the U.S. private sector slowed last month.

The more important jobs report -- the monthly nonfarm payrolls data -- is due Friday morning, which would influence market expectations toward the Fed's timing for the next interest-rate increases.

Analysts said a strong report Friday could spark further selling in the bond market as it would add to market anxiety toward less stimulus from central banks.

The selloff over the past week also underscores how global markets are increasingly integrated and correlated. Technological advancement allows hedge funds and money managers to develop automated trading strategies executed by superfast computers. A shift in sentiment tends to cause investors holding the same position on bonds to unwind at the same time, intensifying the potential contagion across markets.

The Treasury bond market has been through several bouts of swings this year. At the start of the year, the popular trade was betting on higher yields. In recent months, the game shifted into betting on lower yields, known as longs. But the selloff upended these wagers again.

"The long Treasury trade had become very crowded in the last month and with the ECB changing its tune on monetary policy, many traders are eager to exit their long positions before rates reverse course," said Andrew Pace, vice president at Performance Trust Capital Partners LLC.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

July 06, 2017 16:16 ET (20:16 GMT)