Treasuries tumbled, with 30-year bonds on pace for their biggest two-day selloff in more than a year, after the European Central Bank's (ECB's) decision not to expand its stimulus program sparked a rout in global sovereign debt.
Long-dated securities, which have been outperforming in recent months, led losses for a second day after ECB President Mario Draghi said Thursday that officials didn't discuss an extension to the institution's asset-purchase plan, disappointing investors who had been speculating that more stimulus was imminent. Treasury 10-year yields rose to the highest since June as German 10-year bund yields turned positive for the first time since July.
While yields are still lagging below historical averages, they're quickly rising from record lows reached earlier this year, recalling the bond rout of 2015, which saw German 10-year yields climb more than a percentage point in less than two months. The selloff comes before Federal Reserve officials meet Sept. 20-21 to decide the path of U.S. interest rates, and as the Treasury plans three fixed-rate note and bond auctions early next week.
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The global selloff is "occurring because the market is reassessing how different central banks are implementing policy," said Aaron Kohli, fixed-income strategist at BMO Capital Markets Corp., one of 23 primary dealers that trade with the Fed. "Combined with a crowded Treasury calendar next week, the rates market started to sell off and appears to be heading towards a more significant correction."
Treasury 30-year bond yields rose nine basis points, or 0.09 percentage point, to 2.39 percent as of 12:36 p.m. New York time, according to Bloomberg Bond Trader data. That comes after yields rose seven basis points on Thursday, adding up to the biggest two-day rise since August 2015. The price of the 2.25 percent security due in August 2046 was 97 1/32.
The difference in yield on Treasuries due in 2 years and 30 years, a gauge of the yield curve, widened to about 160 basis points, the most on an intraday basis since Aug. 5.
The bond-market selloff is shattering a prolonged period of calm that had fueled concerns of investor complacency. The ECB's decision to stand pat has traders questioning whether interest rates have bottomed out, and whether central banks are approaching the limits of monetary easing.
Effect of the Fed Rate-Hike Path
"There's a big move in the market, but it's way too premature to believe that central banks have reached the end of their line in policy making," said Krishna Memani, chief investment officer at Oppenheimer Funds Inc., which oversees $223 billion. "Once you get beyond these central-bank meetings, the overall economic condition and global deflationary environment reasserts itself."
Fed policy makers are looking to raise interest rates after liftoff from near zero in December. Officials entered 2016 expecting four hikes this year but have since pared projections amid signs of sluggish global economic growth.
Boston Fed President Eric Rosengren struck a more hawkish tone Friday, saying waiting too long to raise rates may lead to the U.S. economy overheating.
Futures pricing indicates about a 32 percent chance of tighter policy this month, according to data compiled by Bloomberg. The probability of a hike by year-end was 60 percent. The calculations assume the effective fed funds rate will average 0.625 percent after the central bank's next boost.
"In terms of what the Fed's trying to do, they need to get to a more balanced probability around the meeting—otherwise, there's no point in meeting if everyone's absolutely sure they're not going to do anything," Steven Major, global head of fixed-income research at HSBC, said in an interview with Bloomberg Television. "If they did want to hike, the last thing they want is a huge market shock, so the Fed's speeches are being used to manipulate the probabilities a bit higher. But frankly, I reckon, nothing will happen."
The yield on German 30-year bunds climbed 10 basis points to 0.61 percent Friday, adding to a nine-basis-point jump the previous day, while the U.K. and Japan, two markets that have help drive the global bond rally this year, also saw losses.
The yield on U.K. 30-year gilts rose 12 basis points, to 1.50 percent, approaching the highest since the Bank of England cut interest rates and boosted its quantitative easing plan.
Goldman Sachs Group Inc., a primary dealer in both the U.S. and Japan, warned in May that Japan could be the catalyst for the next international selloff in bonds. While there's no immediate danger of a global spike in long-term yields amid tepid inflation worldwide, any shift in the BOJ's unprecedented asset-purchase plan would have a ripple effect, it said.
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