Draghi Sparks Selloff in Global Bonds
June 27 2017 - 4:17PM
Dow Jones News
By Min Zeng
European Central Bank President Mario Draghi sparked a broad
wave of selling in government bonds of the developed world,
highlighting investors' vulnerability when major central banks
pivot toward a less accommodative monetary policy.
The center of the selling was government bonds in the eurozone.
The yield on the 10-year German bund, the benchmark for the
eurozone's debt markets, posted the biggest one-day rise since Dec
2015, according to Tradeweb. Yields rise as bond prices fall.
The selling pressure spread to government bonds in Denmark,
Sweden, the U.K. and the U.S., pushing up the yield on the
benchmark 10-year Treasury note from its 2017 low set Monday. The
yield on the benchmark 10-year Treasury note settled at 2.198%, up
from 2.135% on Monday.
Mr. Draghi hinted Tuesday that the ECB might start winding down
its large monetary stimulus as the eurozone economy picks up speed,
even as he warned against an abrupt end to years of easy money.
The comment surprised many investors because Mr. Draghi appeared
to be more hawkish compared with his comment earlier this month,
fueling anxiety that the value of government bonds would fall when
the central bank starts reduce its monthly large bond
purchases.
"It is the risk that policy accommodation may be removed sooner
than previously thought, spelling trouble for investors," said
Christopher Sullivan, chief investment officer at the United
Nations Federal Credit Union.
The yield on the 10-year German bund rose to 0.37%, the highest
close since May 24, compared with 0.249% Monday, according to
Tradeweb.
Italy's bond market was the hardest hit with the 10-year bond
yield soaring to 2.052% from 1.893% Monday, according to
Tradeweb.
The ECB's large bond buying program, along with that from the
Bank of Japan, has been a big factor pushing down global government
bond yields to their historically low levels over the past few
years. The buying has helped keep a lid on the U.S. Treasury bond
yields even as the U.S. labor market is approaching full employment
and the Federal Reserve has raised interest rates four times since
Dec. 2015.
Tuesday's selling reminds bond investors the broad ripples from
central bank policies as these banks are becoming a large presence
in the world's major government debt market. As the world's
financial markets are increasingly correlated and with trading
increasingly automated, a selloff or rally in one market easily
transmits into other peers.
Investors remember the 2013 taper tantrum in the Treasury
market. The 10-year Treasury yield soared after bond investors were
spooked by then Fed Chairman Ben Bernanke's comments that the
central bank may start reducing bond buying soon. The selloff
rippled to other bond markets, pushing up long-term borrowing costs
for consumers and businesses and undercut the growth momentum.
The German government bond market led a broad selloff in 2015
when concerns grew over the ECB's bond buying program, showing how
vulnerable these haven bond markets -- among the world's most
liquid assets -- have become due to unconventional monetary policy.
Critics have said that the bond buying program has distorted bond
market signals, and investors are finding it hard to put a price
tag on bonds' valuation.
Brian Brennan, portfolio manager at T. Rowe Price, said the risk
of a tantrum type of selloff is low at the moment. Still, Mr.
Brennan said government bonds are rich in valuation and investors
tend to "frontrun" central bank policies, which bondholders
vulnerable when sentiment sours.
Central bankers have been careful in managing market
expectations to avoid another bond market rout that would hurt the
broader economy. Fed Chair Janet Yellen said Tuesday that the
central bank intends to "very gradually and predictably" shrink its
balance sheet, another step in its plan to normalize interest rate
policy.
Officials from the ECB and BOJ have been cautious too. So far,
top ECB officials have avoided discussing the future of their bond
purchases after December, when the program is currently set to
end.
Mr. Draghi said Tuesday that the ECB's stimulus policies are
working and will be slowly withdrawn as the economy accelerates.
However, he warned that "any adjustments to our stance have to be
made gradually, and only when the improving dynamics that justify
them appear sufficiently secure."
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
June 27, 2017 16:02 ET (20:02 GMT)
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