Bond Prices Fall on WSJ Report on Draghi

By Min Zeng Features Dow Jones Newswires

Prices of U.S. government bonds fell Thursday, breaking a three-day winning streak, after The Wall Street Journal reported that European Central Bank President Mario Draghi is scheduled to attend a high-profile central bank forum for the first time in three years.

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Mr. Draghi is scheduled to address the Federal Reserve's Jackson Hole conference in August in a speech that is expected to give a further sign of the ECB's growing confidence in the eurozone economy and its reduced dependence on monetary stimulus, the WSJ reported, citing a person familiar with the matter.

Hawkish comments from the ECB chief on June 27 kick-started the recent global government bond market selloff.

The bond market stabilized earlier this week. It rallied on Wednesday after Federal Reserve Chairwoman Janet Yellen's semiannual testimony to Congress bolstered market expectation that the Fed would be very slow in tightening monetary policy. This factor earlier Thursday had pushed down the yield on the benchmark 10-year Treasury note to 2.305%, according to Tradeweb.

But the WSJ report sparked a bout of selling in the bond market, pushing up bond yields. The 10-year Treasury yield was recently at 2.334%, compared with 2.325% Wednesday. Yields rise as bond prices fall.

The yield on the 10-year German bund, the center of the recent bond market rout, rose to 0.526% from 0.510% Wednesday.

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The latest bond market gyration underscores bond investors' sensitiveness to central bank policy outlook.

A large bond-buying program from the ECB, along with that by the Bank of Japan, has played a big role driving global bond yields to historically low levels over the past few years. The risk for bond investors is that the value of their bonds would fall as major central banks pivot toward less monetary stimulus.

The swing also underlines how central banks' ultra loose policy since the financial crisis has increased the linkage among bond markets in the developed world. Analysts say this factor means the Treasury bond market is vulnerable to any selloff in bunds or other bond markets.

Mr. Draghi's last speech at Jackson Hole in August 2014 was widely seen as heralding the start of the ECB's bond-buying program, known as quantitative easing or QE. Signaling the end of the program at the same event would have a certain symmetry, a person familiar with the matter told the WSJ.

"We think that longer-term interest rates now pivot more off of international rate policy, such as that stemming from the ECB and the BOJ, and not solely on what the Fed is doing," said Rick Rieder, chief investment officer of global fixed income at BlackRock.

Raman Srivastava, deputy chief investment officer and managing director of global fixed income at Standish Mellon, said a further rise in German bund yields is "a big risk for Treasury bonds."

Mr. Srivastava said he has cut Treasury bondholdings during the recent selloff. He expects the 10-year Treasury yield to rise close to 2.75% at the end of this year.

One factor keeping a lid on a rise in Treasury bond yields, said some money managers, is tame inflation, which is a big threat to the value of long-term government bonds.

Ms. Yellen on Wednesday acknowledged the uncertain outlook on inflation. Traders said this was a slight change from her recent comments signaling that a recent slowdown in inflation would be temporary.

Friday's consumer-price index data for June is the key to watch on inflation. If the data points to a potential rebound in inflation, it would spook bond investors and send yields climbing, said some investors.

"Yellen seemed to waver on her recent mantra that inflation was transitory," said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. "This makes tomorrow's CPI number one of the most important on record for the outlook of rates."

Yields are still low. The 10-year yield remains below the 2.446% settled at the end of 2016.

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

Prices of U.S. government bonds fell Thursday after three days of gains, on renewed anxiety that major central banks are preparing to tighten the easy-money policies that have helped prop up asset prices since the financial crisis.

A key driver for Thursday's selling was a report from The Wall Street Journal that European Central Bank President Mario Draghi is scheduled to address the Federal Reserve's Jackson Hole conference in August, some analysts and investors said. Mr. Draghi is expected to give further signs of the ECB's growing confidence in the eurozone economy and its reduced need for monetary stimulus, the Journal reported, citing a person familiar with the matter.

The latest bond-market gyration underscores investors' sensitivity to the global outlook for monetary policy. Large bond-buying programs from the ECB and Bank of Japan have helped drive global yields to historically low levels over the past few years. The risk for investors is that the value of their bonds could fall as central banks pivot toward reducing monetary stimulus.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.348%, compared with 2.325% Wednesday. Yields rise as bond prices fall.

The yield on the 10-year German bund, the center of the recent bond market rout, rose to 0.522% from 0.510% Wednesday.

Raman Srivastava, deputy chief investment officer and managing director of global fixed income at Standish Mellon, said a further rise in German bund yields is "a big risk for Treasury bonds."

Mr. Srivastava said he has cut Treasury holdings during the recent selloff. He expects the 10-year Treasury yield to rise close to 2.75% at the end of this year.

Worries about a pivot toward reduced monetary stimulus led to relatively tepid demand for a $12 billion sale of 30-year Treasury bonds on Thursday afternoon, some investors said. The bonds were sold at a yield of 2.936%, higher than 2.925% before the auction and a sign demand was weaker than dealers had anticipated.

The Treasury bond market had stabilized earlier this week following a two-week selloff, rallying on Wednesday after Fed Chairwoman Janet Yellen's semiannual testimony to Congress bolstered market expectation that the Fed would be very slow in tightening monetary policy.

Earlier Thursday, the yield on the 10-year Treasury note had fallen to 2.305%.

The swing underlines how ultraloose monetary policy since the financial crisis has increased the linkage among bond markets in the developed world. Analysts say this factor means the Treasury bond market is vulnerable to any selloff in bunds or other bond markets.

Mr. Draghi's hawkish comment on June 27 kicked off the recent global bond market rout. A day before his remark, the 10-year Treasury note settled at this year's low of 2.135%.

"We think that longer-term interest rates now pivot more off of international rate policy, such as that stemming from the ECB and the BOJ, and not solely on what the Fed is doing," said Rick Rieder, chief investment officer of global fixed income at BlackRock.

Some money managers say they don't expect a sustained rise in bond yields without inflation picking up speed.

U.S. reports have showed inflation pressure slowed down with some indicators falling below the Fed's 2% target. Ms. Yellen on Wednesday acknowledged the uncertain outlook on inflation. Friday's consumer-price index data for June is the key to watch on inflation.

"With growth still trending around 2% and low inflation, I do not think it is a permanent rise in rates," said Gemma Wright-Casparius, senior money manager at Vanguard Group. "It would take a sharp acceleration in inflation or a sharp tightening of monetary liquidity to change my view."

Inflation eats into bond investors' purchasing power from fixed income investments and is a big threat to long-term government bonds.

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

(END) Dow Jones Newswires

July 13, 2017 17:29 ET (21:29 GMT)