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 stimulus efforts that have supported debt markets.

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The eurozone remained at the center of the selling as the yield on the benchmark 10-year German government bond rose to its highest level since early 2016. Bond yields also climbed in the U.K., Denmark, Sweden, Canada and the U.S. Yields rise as bond prices fall.

The yield on the U.S. 10-year Treasury note settled at 2.369%, compared with 2.334% Wednesday. That marked the yield's highest closing level since May 11.

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

A key factor driving the selling has been investors' concerns over possible shifts in monetary policy throughout the developed world, triggered by hawkish signals from the European Central Bank, the Bank of England and the Bank of Canada last week.

Some of Thursday's moves came after the release of minutes from the ECB's recent policy meeting. Those showed ECB officials in June discussed how to signal their increasing confidence in the eurozone economy and considered dropping a pledge to accelerate their massive bond-buying program. That came after the Federal Reserve's minutes Wednesday afternoon suggested U.S. policy makers may start paring back the central bank's large bondholdings in coming months.

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Fresh new debt sales from Spain, France and the U.K. added to the selling pressure, traders said.

Bond buying and other stimulus from the ECB and the Bank of Japan have helped push global government bond yields to historically low levels over the past years. Analysts have warned that the value of government bonds, propped up by these big buyers, would drop once central banks reduce support.

The selloff, which has persisted in the U.S. for six of the past seven sessions, shattered months of relative calm in bond markets. The 10-year Treasury yield had fallen to 2.135% on June 26, the lowest closing level this year. Since then, the yield has risen 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.

Some investors said higher bond yields reflect optimism toward the economic outlook. Recent data have pointed to broad improvement in the global economy, which supports the case for major central banks to become less generous in providing monetary stimulus. A monthly gauge of the U.S. service sector Thursday continued to point to solid expansion.

Investors also are looking to Friday's jobs report for signals on the Fed's timing for possible future interest-rate increases. Some analysts said a strong report could spark further selling.

Bond yields remain at very low levels from a historical standpoint. The 10-year Treasury yield is still below 2.446%, where it settled at the end of last year. And previous selloffs in recent years have proved short-lived. Now debate is growing among investors about whether the current bout may soon fade or gain more momentum.

In May 2013, then Fed Chairman Ben Bernanke said that the central bank could start cutting bond buying in coming months, which caught some investors off guard, sending the 10-year Treasury yield soaring and causing a record pace of outflows from bond funds.

"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.

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

(END) Dow Jones Newswires

July 06, 2017 17:31 ET (21:31 GMT)