Global Bonds Sell Off, Deepening Losses

By Min Zeng Features Dow Jones Newswires

Global government bonds sold off on Thursday and deepened their price losses over the past week, as anxiety toward less monetary policy support from major central banks continued to drive investors to cut bondholdings.

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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, touched 2.384% earlier Thursday morning, the highest level since May 11, according to Tradeweb. The yield was 2.375% in recent trading, compared with 2.334% Wednesday.

Yields rise as bond prices fall.

Last week's selloff broke the calm tone in the bond market that had persisted for months. The 10-year Treasury yield had fallen to 2.135% on June 26, the lowest closing level this year. Since then, the yield has soared more than 0.2 percentage point, highlighting the vulnerabilities of bondholders from a sudden shift in sentiment.

The key factor hurting the bond market has been concerns over a shift in the monetary policy outlook in the developed world, triggered by hawkish comments from policy makers at the European Central Bank, the Bank of England and the Bank of Canada last week.

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

One trigger for Thursday's selling was the minutes from the ECB'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.

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

In addition, 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 nonfarm payrolls data -- is due Friday morning, which would influence market expectations toward the Federal Reserve's timing for the next interest rate increases.

Large bond buying monetary stimulus from the ECB and the Bank of Japan, known as quantitative easing, have played a big role in sending global government bond yields to historically low levels over the past years. Analysts have warned that the value of government bonds, artificially propped up by these big buyers, would drop once central banks reduce support.

"The gist is that QE forever is coming to an end at some point," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

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.

One risk, said some analysts, is that a rapid rise in yields could rattle riskier markets. Concerns have been rising over the valuation of U.S. stocks whose prices have reached record highs last month. The 10-year Treasury yield is a yardstick for money managers to value other assets, so as the base rate rises, it may hurt the value of stocks, corporate bonds and emerging market assets.

Bond yields remain at very low levels from a historical standpoint. The 10-year Treasury yield is still below 2.446% settled at the end of last year. In mid March, the yield traded above 2.6%. Over the past years, the bond market has suffered a number of selloffs but they were short-lived.

Now debate is growing among investors whether the current selloff episode may soon fade again or it could gain more momentum and become a repeat of the taper tantrum in 2013.

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

Some money managers said the risk of a taper tantrum repeat is low as policy makers at the world's major central banks would try to avoid a market shock that would undercut the economic growth outlook.

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

(END) Dow Jones Newswires

July 06, 2017 10:59 ET (14:59 GMT)