Global Government Bonds Stabilize After Selloff

By Min Zeng Features Dow Jones Newswires

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

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The yield on the benchmark 10-year Treasury note settled at 2.371%, compared with Friday's 2.393%, the highest level since May 11. Yields fall as bond prices rise.

Government bond yields in Germany, the U.K., France, Italy, Spain and many other European countries also pulled back.

Traders say the recent price declines make the bond market appealing to investors. Some analysts caution that government bonds may still be vulnerable to renewed selling pressure given the anxiety over a global pivot toward reduced monetary policy stimulus.

"Treasurys are oversold in the short term," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

Mr. Milstein, however, said he believes bond yields will likely drift higher in the second half of the year. The tone in the market, he said, 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."

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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 sales of Treasury debt has been investors' worries that major central banks may dial back monetary-stimulus support given signs of broad improvement in the global economy.

Investors are particularly nervous over the European Central Bank, whose bond-buying program has played a big role in sending global yields to historically low levels. Analysts have warned that the value of government bonds may fall when these large and steady buyers dial back support.

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. Friday's nonfarm employment release showed tepid wage inflation growth even as the economy added more than 200,000 jobs last month, which continues to confound investors, analysts and Fed officials.

The U.S. consumer prices report for June -- a key data point this week to influence investors' bets on bond yields -- is scheduled for release Friday.

Federal Reserve Chairwoman Janet Yellen is scheduled to hold her semiannual testimony before Congress on Wednesday. Ms. Yellen has shrugged off recent softening inflation readings as temporary. The Fed's minutes for its June meeting suggested the central bank may start 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.

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.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said he is "anxious something more sustainable may be afoot" regarding softer inflation, citing factors that include the easing of owners' equivalent rent, falling auto prices, and slipping apparel costs.

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 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 yields to rise, they say.

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

(END) Dow Jones Newswires

July 10, 2017 15:53 ET (19:53 GMT)