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Bond rout wipes out 2015 gain
[NEW YORK] The global bond market selloff has erased all of this year's gains as historic market moves from Germany to the US and Japan whipsaw traders.
After being up as much as 2.3 per cent as of mid-April, the Bank of America Merrill Lynch Global Broad Market Index of bonds with a total face value of US$41 trillion is now down 0.4 percent for the year.
Bond traders have been caught off guard by signs the worldwide economy is likely to avoid mass deflation and by improvement in the euro zone's economy, leaving little incentive to own debt securities with yields that in some cases are below zero. The latest leg lower in bonds came on Wednesday, when European Central Bank President Mario Draghi said investors should get used to the heightened volatility they've seen in recent weeks.
"This is sheer panic in the market from the standpoint of what's been happening in Europe," said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. "Most of Wall Street is guarded here as far as taking on new positions." Like many of his peers around the world, Mr di Galoma said he has had to cancel meetings as yields rose ever higher through key levels that many thought would attract demand, but didn't.
Take the yield on the benchmark 10-year German bund: it soared to as high as 0.897 per cent Wednesday from as low as 0.049 per cent on April 17. During the same period, the yield on similar maturity US Treasuries surged to as high as 2.39 per cent from 1.84 per cent.
The benchmark Treasury 10-year yield was little changed Thursday at 2.37 per cent as of 1.48 pm Tokyo. The price of the 2.125 per cent note due May 2025 was 97 27/32.
At a conference in Cambridge, Mass., Michael Lorizio said he couldn't keep his eyes away from his phone, where price alerts were announcing a crash in German bond prices. He said he skipped out early from the networking session, and headed back to his office in Boston.
"I couldn't pay attention to any of the content, I was just watching the price action," said Mr Lorizio, senior bond trader at Manulife Asset Management. "You've had to be a little more decisive because prices are moving very quickly." At a news conference in Frankfurt Wednesday after an ECB policy meeting, where it didn't even change rates, Mr Draghi suggested several reasons for the rout in bonds. He cited including an improving economic and inflation outlook in the euro area, heavier issuance, volatility, poor market liquidity and an absence of certain investors.
Mr Draghi, the architect of a 1 trillion-euro ($1.13 trillion) bond-buying program, is an unlikely foe of the bond market. Quantitative easing provides an almost endless source of demand for bonds and should keep yields low.
Instead, it's made investors overly sensitive, said Jim Bianco, president of Bianco Research LLC in Chicago.
"You want to shove rates down to zero, people are going to make big bets because they don't think it can last," Mr Bianco said. "Every move becomes a massive short squeeze or an epic collapse - which is what we seem to be in the middle of right now." This time, it was a June 2 report that the euro zone had experienced one month of inflation, of 0.3 per cent, the first increase in six months, which sent investors overboard. That set off doubts about how long ECB policy makers will cling to a set of stimulus measures that look more appropriate for Europe in the throes of recession and deflation.
After five years of unprecedented central bank stimulus the reversal is a blow. Last year, global investors earned 7.8 per cent on bonds, compared with 4.8 per cent on stocks.
BLOOMBERG
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