Investors dumped government bonds on Wednesday, marking a second day of heavy selling for Treasurys and eurozone debt after the European Central Bank hinted it would unwind some of the EUR2.3 trillion ($2.6 trillion) in bond buying that has buoyed these markets.
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As investors bet the days of easy money may be over, the euro also continued its rise against the dollar following its biggest one-day gain in a year on Tuesday.
Analysts are now weighing whether these moves will turn into a full-scale "taper tantrum" or whether investors' continued hunger for fixed-income assets will temper any wider selloff.
"Yesterday was the first explicit sign that [the ECB will] be looking to remove some of the stimulus," said Mike Bell, global market strategist at J.P. Morgan Asset Management. "Clearly not everybody was expecting that."
The yield on Germany's 10-year government bond rose to 0.390%, according to Tradeweb, its highest level in over a month and up from around 0.247% on Monday's close. Yields rise as prices fall. Government and corporate bonds across the eurozone were also weaker.
The selloff in eurozone debt has also pushed Treasury yields higher over the past two sessions. The yield on the 10-year note was at 2.250% recently, compared with 2.135% at Monday's close.
The euro was up 0.2% at $1.1364 in late European morning trade, around its highest level since Britain voted to leave the European Union last June.
Monetary stimulus such as bond buying typically depresses a currency, given it pushes down debt yields and so makes the region less attractive for foreign investors.
Investors were rattled on Tuesday when ECB President Mario Draghi talked of a "strengthening and broadening recovery" in the eurozone's economy.
Mr. Draghi also couched his comments with caution, saying that moves to halt bond purchases would "have to be made gradually" and only when the path of growth and inflation was "sufficiently secure."
But many investors took his comments as a sign the ECB is laying the groundwork to announce a tapering of the EUR60 billion monthly buying of government and corporate debt at its September meeting and to start scaling back those purchases next year.
The ECB's stimulus program has pinned down bond yields in the eurozone in recent years, helping to lower financing costs for governments and companies in the region.
The jerk higher in yields following Mr. Draghi's comments reminded investors of other so-called taper tantrums, when investors have tried to pre-empt central banks scaling back their stimulus measures by selling bonds.
In 2013, the yield on the 10-year Treasury note rose sharply and emerging markets sold off after the Federal Reserve raised the prospect of slowing its bond purchases. European bonds have also been sold in recent years as investors anticipated an end to the stimulus.
Many analysts have long expected the ECB to signal it will begin winding down its buying in 2018 amid signs that the eurozone economic recovery is gaining momentum. Mr. Bell said German 10-year bond yields could climb another 0.2 to 0.3 percentage point by year-end, while the euro could rise to $1.15.
Still, others are less sure yields will continue to spike. Olivier de Larouzière, head of interest rates at Natixis Asset Management, said yield-hungry institutional investors have seen the selloff as a buying opportunity. He said his trading desk had seen flows from Japanese and French insurance companies scooping up long-dated French government bonds on Wednesday.
Recent bond selloffs have proved fleeting. The 10-year Treasury yield nearly doubled during the 2013 taper tantrum to around 3%, only to hit a record low of 1.366% last year.
Investors also sold bonds following the election of Donald Trump on expectations of higher growth and inflation, with Treasury yields hitting a recent high of 2.609% in March. But recent signs that inflation's gains are more muted have pushed down Treasury yields once more, sinking to a 2017 low of 2.135% on Monday.
"As soon as you get a yield pickup, you get buyers, because investors are desperate for yield," said Mr. de Larouzière.
He noted that the 10-year bund yield had traded between 0.15% and 0.5% over the past several months. He advised selling when the yield approaches the bottom of that range and buying whenever yields rise toward the top of it.
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(END) Dow Jones Newswires
June 28, 2017 07:26 ET (11:26 GMT)