By Christopher Whittall
Global government bond prices slumped for a third straight day
Thursday and the dollar fell, as investors continued to anticipate
the end of the central bank easy-money policies that have dominated
markets in recent years.
But investors debated whether the current selloff is a
significant change in direction or just a period of volatility,
like past so-called taper tantrums.
For now, investors are selling in moves that could have big
consequences across markets and for local economies should they
continue.
They dumped U.S. Treasurys and European bonds Thursday morning,
sending yields on many securities to their highest levels in more
than a month. Meanwhile, the euro, British pound and Canadian
dollar logged further gains against the U.S. dollar after rising
sharply earlier this week. The WSJ Dollar index is now below the
level it was before Donald Trump's November election.
Many investors believe yields could still have a long way to
rise, given how far they have fallen in recent years and the latest
buoyant economic data. Rebounding economic growth suggests central
banks will start unwinding the stimulus that has underpinned
markets since the financial crisis. Despite the recent pickup, the
yield on the 10-year Treasury note is still less than a percentage
point higher than its all-time low of 1.366% reached last July.
Still, others argue that structural changes mean bonds will
continue to find buyers, with the West's aging populations putting
money into pension funds and insurance companies that need a
reliable stream of income. Some investors also doubt if central
banks, particularly in Europe, are ready to turn off the taps given
low levels of inflation.
"The jury is still out," said Stefan Isaacs, deputy head of
retail fixed interest at M&G Investments.
Mr. Isaacs is betting that bond yields will rise, arguing that
in Europe, in particular, they are too low given the economic
outlook. That said, he believes yield-hungry investors like pension
funds will step in if yields move markedly higher.
"There are other forces at work [in the market] that
historically haven't been as dominant. I don't think we're going to
take bond yields back to the levels that we assumed were normal
precrisis," he said.
If sustained, the spike in yields and currency moves would
ripple across markets and through local economies. Rising
government bond yields tend to make borrowing more expensive for
companies and consumers, long used to cheaper finance. A stronger
euro may hurt European exporters, making their international
revenues worth less and their products less competitive.
Low bond yields have also pushed investors into stocks at
elevated valuations, given the skinny returns from debt. Higher
yields will likely weigh on so-called bond proxy stocks such as
utility companies, which offer investors a steady stream of income
through dividends and whose shares have fallen this week. Bank
stocks have risen, as lending becomes more profitable when rates
are higher.
Thursday's moves follow comments from some of the world's
largest central banks pointing to a reduction of the extraordinary
stimulus measures to support their economies following the
financial crisis.
The euro rose for a third straight day against the dollar. It
was up 0.2% recently at $1.397--hovering around levels not seen in
over a year. The British pound and the Canadian dollar rose against
the buck after both notching large gains on Wednesday, up 0.3% and
0.1% respectively recently. The dollar is under pressure as
expectations for rate rises in other countries boost their
currencies. Rates rise often bring more money into a country as
investors look for the extra yield, that boosts the local
currency.
The yield on the 10-year Treasury note rose to 2.276% from
2.223% on Wednesday, according to Tradeweb, on track for its
highest close in over a month. Eurozone and U.K. government bond
yields also climbed. Still, long-dated Treasury and European bond
yields are still trading lower than levels reached earlier in the
year, showing the current rise has come from a low starting
point.
The market moves started on Tuesday when European Central Bank
President Mario Draghi acknowledged a "strengthening and
broadening" economic recovery in the eurozone.
Many investors interpreted that as a sign the central bank was
preparing to trim its EUR2.3 trillion ($2.62 trillion) bond-buying
program, which has boosted asset prices and helped push down the
euro in recent years. Speaking Wednesday at the same conference in
Portugal, the chiefs of the Bank of Canada and Bank of England
suggested they'd be reducing monetary stimulus in the form of
raising interest rates.
Still, some investors say the communications from central banks
have at times been confusing, adding to the skepticism that these
moves will be long lasting.
Even this week, top ECB officials have left some investors with
mixed impressions about when it will reel in its massive bond
buying, which is currently slated to continue at least until the
end of 2017. BOE chief Mark Carney said last week now wasn't the
time to hike U.K. rates but hinted in a speech Wednesday that the
time could in fact be near.
"The members of the central banks are not all singing from the
same hymn sheet," said Steven Saywell, global head of
foreign-exchange strategy at BNP Paribas SA.
"I think there will be volatility" in the coming days, said Mr.
Saywell, as investors digest mixed signals from some of the world's
largest central banks.
The gyrations mark a sharp turnaround for developed market
bonds. The yield on the 10-year Treasury note fell to 2.135% on
Monday--its lowest level since November--amid expectations that
weaker than expected inflation in much of the developed world would
deter central bankers from tightening monetary policy too
quickly.
This week's moves recall other so-called taper tantrums, when
bond yields ground higher over a period of several weeks or even
months as investors tried to pre-empt central banks' scaling back
their stimulus measures by selling bonds.
In 2013, the yield on the 10-year Treasury note jumped and
emerging markets fell after the Federal Reserve raised the prospect
of slowing its bond purchases, which eventually ended in October
2014.
But yields have risen before only to fall back again. The
10-year Treasury yield briefly rose above 3% in late 2013, but hit
a record low of 1.366% last July.
Write to Christopher Whittall at
christopher.whittall@wsj.com
(END) Dow Jones Newswires
June 29, 2017 09:03 ET (13:03 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.