Yield on benchmark 10-year Treasury note hits the highest intraday level since September 2014
Source: The Wall Street Journal
The global bond market rout is deepening Thursday after the Federal Reserve’s latest signal about a quicker pace of interest-rate increases next year provided a fresh catalyst for investors to sell government bonds.
The selling sent the yield on the benchmark 10-year Treasury note to as high as 2.639% earlier Thursday, the highest intraday level since September 2014. The yield was recently at 2.584% as selling eased, compared with 2.523% Wednesday. Yields rise as bond prices fall.
Government bond yields from Asia and Europe also climbed. China’s 10-year and five-year Treasury bond futures recorded their biggest-ever declines in early trading, dropping by 2% and 1.2% respectively, prompting exchange authorities there to suspend trading of the securities.
The latest episode deepened a big shift in the bond market that has sent yields climbing after falling to their record lows following the Brexit vote this summer.
Investors had piled into government bonds, especially long-term debt, as they expected a prolonged period of soft global growth, low inflation and ultraloose monetary stimulus from major central banks in Japan and Europe.
But global data over the past few months have shown an improved economic outlook and a tick-up in inflation pressure, causing investors to lighten up on bonds. That narrative has been gaining traction after the U.S. election on Nov. 8, as expectations have been growing that expansive fiscal policy, lower taxes and lighter regulation proposed by U.S. President-elect Donald Trump would lead to stronger growth and higher inflation.
“The trend for yields is going higher,’’ said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. “All the macro drivers are pointing to higher yields.”
Mr. Ren said the 10-year Treasury yield is likely to rise to 3% over the next few months, a level last traded in early 2014. Mr. Ren said he has prepared for the rise in yields by cutting exposure to long-term bonds over the past few months.
Between the election day and this past Wednesday, the global bond selloff has wiped out $1.45 trillion in market value from the Bloomberg Barclays Global Treasury index, which tracks government bonds in both developed and developing countries.
The Treasury bond market overall have handed investors a total return of 0.4% this year through Wednesday, according to Bloomberg Barclays bond indexes data. The sector had logged a 6.2% return between the end of last year and July 8, when the 10-year yield closed at a record-low yield of 1.366%.
Long-term bonds suffered even more. Treasury debt maturing in 10 years or more posted a negative 0.34% return this year through Wednesday, after posting a 19% return through July 8. Total return includes bond price changes and interest payments.
The Fed announced Wednesday afternoon it is raising short-term interest rates for the second time since 2006. While the decision is widely expected, what spooked bond investors is that the Fed had previously projected three rate increases for 2017, compared with two from its September policy meeting. Higher interest rates from the central bank tend to shrink the value of outstanding bonds.
Adding to higher yields Thursday, traders said, were upbeat manufacturing release for the eurozone and retail sales in the U.K. The 10-year U.K. gilt was one of the biggest losers Thursday with its yield up more than 0.1 percentage point, a faster pace compared with the 10-year yields in the U.S. and Germany.
Many investors and analysts say the rise in yields is a healthy sign as it reflects optimism toward the growth outlook and is a sign the bond market is normalizing from ultralow yields.
The 10-year Treasury yield had fallen steadily from its record high in 1981. The yield is still less than half of where it was in the summer of 2007, and is up modestly from 2.273% at the end of 2015.
The big rise in yields had attracted buying interest, with solid demand from the 30-year bond auction earlier this week. Yet traders say some prospective buyers may decide to stay on the sidelines for longer as they are worried that the bond market’s selloff still has room to go before reversing.
”Buyers need to be aware,’’ said Anthony Cronin, a Treasury bond trader at Société Générale. “As the old cliché goes, it’s like trying to catch a falling knife.”
So far the big rise in yields hasn’t rattled the U.S. stock market. One popular trade since the U.S. election has been to sell Treasurys and buy stocks, sending equity indexes to record high this week. The Dow Jones Industrial Average was up 0.4% recently at 19870.
But even some bond bears are starting to sound the alarm on the potential negative impact from the bond market selloff. Francesco Garzarelli, co-head of fixed-income strategy at Goldman Sachs, warns that a further rise from bond yields “may start to pose a threat to the risk asset complex unless incoming data validate the optimism they now discount, in the U.S. and abroad.”
Higher bond yields raise long-term borrowing costs for U.S. consumers and businesses. Mortgage rates for example have been rising in recent weeks.
Higher bond yields in the U.S. also boosted the allure of the U.S. dollar. The WSJ Dollar Index, which measures the U.S. unit against a basket of 16 currencies, extended gains Thursday after closing at its highest level Wednesday since October 2002.
A stronger dollar is causing capital flight out of developing countries and generating financial instability. It also hurts U.S. exports. U.S. firms with a large presence in foreign countries would also see their earnings outside the U.S. get eroded by a strengthening dollar.
Some investors think the bond selloff is overdone.
”I’m quite bullish on government bonds, particularly Treasurys,” said Mike Riddell, a portfolio manager at Allianz Global Investors.
Mr. Riddell noted that the Fed was projecting four rate increases in 2016 last December, but in the end it moved raised rates only once this year. The Fed had grown more cautious earlier in the year after a stronger dollar tightened financial conditions across the globe and caused turmoil in emerging markets.