Global Government Bonds Stabilize After Selloff

By Min Zeng Features Dow Jones Newswires

Global government bonds strengthened Monday, showing some signs of stabilization following a two-week selloff.

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Traders say the recent price declines make the bond market appealing to a number of investors.Some analysts say the bond market may still be vulnerable to renewed selling pressure given the anxiety over a pivot toward reduced monetary policy stimulus from major central banks.

"Treasurys are oversold in the short term, but the tone in the market has changed since we have heard from global central bankers during the past couple of weeks that very easy policy will have to come to an end eventually," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "The concerted effort to warn investors is an indication that rates will likely drift higher in the second half of the year."

In recent trading, the yield on the benchmark 10-year Treasury note was 2.384%, according to Tradeweb. The yield settled at 2.393% Friday, the highest level since May 11. Yields fall as bond prices rise.

The yield on the 10-year government bond in Germany, which was the center of the recent selloff, fell by 0.02 percentage point to 0.547%. The yield on the 10-year U.K. government bond fell by 0.02 percentage point to 1.286%.

Meanwhile, the 10-year Treasury note's yield jumped by 0.247 percentage point in the previous two weeks following months of slides. One key factor driving investors to sell Treasury debt has been worries that major central banks may dial back monetary-stimulus support given signs of broad improvement in the global economy.

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Investors are particularly nervous over the European Central Bank, whose bond-buying program has played a big role in sending global government bond yields to historically low levels. Analysts have warned that the value of government bonds may fall when central banks pivot away from their highly accommodative monetary policies that have been the highlight following the 2008 financial crisis.

Some investors say they don't expect a big rise in yields unless inflation pressures flare up. Reports of consumer price moves in the U.S. have pointed to slowing inflation over the past few months. Last Friday's nonfarm employment release showed tepid wage inflation growth even as the economy added more than 200,000 new jobs last month, which continues to confound investors, analysts and Fed officials.

The U.S. consumer-price index report for June is scheduled to be released this Friday, a key data point this week to influence investors' bets on bond yields.

Fed Chairwoman Janet Yellen is scheduled to hold her semiannual testimony before Congress Wednesday. Ms. Yellen has shrugged off recent softening inflation readings as temporary. The Fed's minutes for its June meeting released last week suggested the central bank may start the process in the coming months to pare back its large bondholdings that include more than $2 trillion worth of Treasury debt.

This balance sheet reduction factor is likely to push up long-term Treasury yields, and the 10-year yield may rise to 2.75% or higher at the end of this year, said some analysts and money managers. But others are skeptical that this would happen without signs of stronger growth and higher inflation, which would be a big factor deciding the pace of the Fed's tightening monetary policy.

New debt sales will be another focus this week for bond investors. A $24 billion sale of three-year notes is scheduled on Tuesday, followed by a $20 billion sale of 10-year notes on Wednesday and a $12 billion sale of 30-year bonds on Thursday.

Some traders say the auctions may attract investors who see bonds as a bargain after their recent selloff. Any sign of lukewarm appetite for the auctions could raise anxiety toward the bond market and cause bond yields to rise, they say.

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

(END) Dow Jones Newswires

July 10, 2017 10:47 ET (14:47 GMT)