By Christopher Whittall
Global government bonds and the euro whipsawed on Wednesday as
investors struggled to parse signals from central banks on when the
massive stimulus programs that have underpinned markets will
end.
Top European Central Bank officials left investors with mixed
impressions about when the ECB would reel in its EUR2.3 trillion
($2.6 trillion) bond-buying program, and the chiefs of the Bank of
England and the Bank of Canada both suggested they would be
reducing stimulus.
The euro plunged against the dollar, then recovered. The pound
and the Canadian dollar leapt. Yields on U.K. government bonds shot
up. Yields on Treasurys and other bonds also moved higher.
When and how much western central banks pull back from their
unprecedented run of ultralow interest rates and quantitative
easing are the foremost questions for global investors.
An end to the ECB's bond buying "is probably the most important
supply-demand change that we can foresee in bond markets," said Tim
Haywood, investment director for fixed income at Swiss money
manager GAM.
The prospect of an end to stimulus has lurked in the background
for months but has zoomed to the fore now that signs of an economic
recovery are beginning to appear in regions that have long
struggled to shake off the aftereffects of the global financial
crisis a decade ago, especially in Europe.
Owing to aggressive bank lending and bond buying, ECB has the
largest balance sheet of any global central bank.
Global bond markets have been strongly interconnected, and U.S.
government bonds closely tracked moves in Europe on Wednesday. The
yield on the 10-year Treasury note settled at 2.223%, up from
2.198% Tuesday. Higher yields on European government bonds make
U.S. government bonds less attractive to overseas investors, who
have been buying up Treasurys in search of better returns than what
they can get at home.
Investors had been selling government bonds and buying the euro
since Tuesday, when ECB President Mario Draghi's comments on a
"strengthening and broadening" economic recovery were interpreted
as a sign the central bank was preparing to trim its massive bond
buying.
But those moves briefly reversed on Wednesday. In an interview
on CNBC, Vítor Constâncio, the ECB's vice president, suggested
investors might have overreacted to Mr. Draghi's comments. An ECB
spokesman declined to comment. The euro, which had neared $1.14
earlier in the day, plunged below $1.13.
Then Mr. Draghi, speaking at a conference, repeated his positive
outlook for the eurozone economy. By the early evening in London,
the euro was at $1.1375, up 0.3% on the day.
Meanwhile, Bank of England Gov. Mark Carney said on Wednesday
that removal of stimulus in Britain may become necessary if the
economy improves. That surprised investors, who have been counting
on a very gradual withdrawal. The pound rose 1% against the dollar
to $1.2937. U.K. government bond yields moved sharply higher.
Yields rise as prices fall.
"Central banks are stumbling here and losing a bit of
credibility with mixed communications, whether that's in Europe or
the U.K.," said Jon Jonsson, a senior portfolio manager at
Neuberger Berman.
Speaking at the same conference as Mr. Carney, Bank of Canada
Governor Stephen Poloz said that the central bank might raise
interest rates next month, sending the Canadian dollar 1.2% higher
against the U.S. currency and pushing up government bond
yields.
The volatile trading highlights the sway central banks still
hold in markets.
"The central banks are the near-term likely candidates for
triggering more volatility," said Mr. Jonsson, who expects yields
to continue to rise.
In the eurozone, a run of strong economic data has put investors
on alert that the ECB will soon start to withdraw its stimulus.
Most investors believe that this will start happening in 2018, but
they say the ECB could signal that as soon as this September.
Frederik Ducrozet, senior European economist at Pictet Wealth
Management, said that he had received an unusually large number of
questions about Mr. Draghi's speech on Tuesday. But he believed the
market reaction that followed was largely unjustified.
"It should be no surprise that Draghi sounded increasingly
confident over the growth outlook," he said. The eurozone economy
grew 1.8% in the first quarter of the year over the same period in
2016, compared with 1.2% in the U.S.
This week's moves reminded investors of other so-called taper
tantrums, when markets 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 fell after the Federal Reserve raised the prospect
of slowing its bond purchases. It is also not the first time that
investors have sold off European bonds in recent years as investors
anticipated an end to the stimulus.
But others have cast doubt on how far bond yields can rise given
continued appetite for fixed income from funds. Mike Bell, global
market strategist at J.P. Morgan Asset Management, said he believed
that 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.
The 10-year bund yield traded at 0.363% on Wednesday, up from
0.247% at Monday's close
Olivier de Larouzière, head of interest rates at Natixis Asset
Management, said yield-hungry institutional investors had seen the
selloff in eurozone bonds 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.
"As soon as you get a yield pickup, you get buyers, because
investors are desperate for yield," said Mr. de Larouzière.
--Tom Fairless, Sam Goldfarb and Paul Vieira contributed to this
article.
Write to Christopher Whittall at
christopher.whittall@wsj.com
(END) Dow Jones Newswires
June 28, 2017 17:45 ET (21:45 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.