Global Bonds Gyrate as Investors Try to Parse Central Banks’ Next Stimulus Moves

Comments from chiefs of ECB and Bank of England raise spectre of possible unwinding of stimulus programs

By Christopher Whittall




Global government bonds and the euro whipsawed on Wednesday as investors struggled to parse signals from central banks on when the massive stimulus programs that have underpinned markets will end.

Top European Central Bank officials left investors with mixed impressions about when the ECB would reel in its €2.3 trillion ($2.6 trillion) bond-buying program, and the chiefs of the Bank of England and the Bank of Canada both suggested they would be reducing stimulus.

The euro plunged against the dollar, then recovered. The pound and the Canadian dollar leapt.

Yields on U.K. government bonds shot up. Yields on Treasurys and other bonds also moved higher.

When and how much western central banks pull back from their unprecedented run of ultralow interest rates and quantitative easing are the foremost questions for global investors.

An end to the ECB’s bond buying “is probably the most important supply-demand change that we can foresee in bond markets,” said Tim Haywood, investment director for fixed income at Swiss money manager GAM.

The prospect of an end to stimulus has lurked in the background for months but has zoomed to the fore now that signs of an economic recovery are beginning to appear in regions that have long struggled to shake off the aftereffects of the global financial crisis a decade ago, especially in Europe.

Owing to aggressive bank lending and bond buying, ECB has the largest balance sheet of any global central bank.

Global bond markets have been strongly interconnected, and U.S. government bonds closely tracked moves in Europe on Wednesday. The yield on the 10-year Treasury note settled at 2.223%, up from 2.198% Tuesday. Higher yields on European government bonds make U.S. government bonds less attractive to overseas investors, who have been buying up Treasurys in search of better returns than what they can get at home.

Investors had been selling government bonds and buying the euro since Tuesday, when ECB President Mario Draghi’s comments on a “strengthening and broadening” economic recovery were interpreted as a sign the central bank was preparing to trim its massive bond buying.

But those moves briefly reversed on Wednesday. In an interview on CNBC, Vítor Constâncio, the ECB’s vice president, suggested investors might have overreacted to Mr. Draghi’s comments. An ECB spokesman declined to comment. The euro, which had neared $1.14 earlier in the day, plunged below $1.13.

Then Mr. Draghi, speaking at a conference, repeated his positive outlook for the eurozone economy. By the early evening in London, the euro was at $1.1375, up 0.3% on the day.

Meanwhile, Bank of England Gov. Mark Carney said on Wednesday that removal of stimulus in Britain may become necessary if the economy improves. That surprised investors, who have been counting on a very gradual withdrawal. The pound rose 1% against the dollar to $1.2937. U.K. government bond yields moved sharply higher. Yields rise as prices fall.

“Central banks are stumbling here and losing a bit of credibility with mixed communications, whether that’s in Europe or the U.K.,” said Jon Jonsson, a senior portfolio manager at Neuberger Berman.

Speaking at the same conference as Mr. Carney, Bank of Canada Governor Stephen Poloz said that the central bank might raise interest rates next month, sending the Canadian dollar 1.2% higher against the U.S. currency and pushing up government bond yields.

The volatile trading highlights the sway central banks still hold in markets.

“The central banks are the near-term likely candidates for triggering more volatility,” said Mr. Jonsson, who expects yields to continue to rise.

In the eurozone, a run of strong economic data has put investors on alert that the ECB will soon start to withdraw its stimulus. Most investors believe that this will start happening in 2018, but they say the ECB could signal that as soon as this September.

Frederik Ducrozet, senior European economist at Pictet Wealth Management, said that he had received an unusually large number of questions about Mr. Draghi’s speech on Tuesday. But he believed the market reaction that followed was largely unjustified.

“It should be no surprise that Draghi sounded increasingly confident over the growth outlook,” he said. The eurozone economy grew 1.8% in the first quarter of the year over the same period in 2016, compared with 1.2% in the U.S.

This week’s moves reminded investors of other so-called taper tantrums, when markets have tried to pre-empt central banks’ scaling back their stimulus measures by selling bonds.

In 2013, the yield on the 10-year Treasury note rose sharply and emerging markets fell after the Federal Reserve raised the prospect of slowing its bond purchases. It is also not the first time that investors have sold off European bonds in recent years as investors anticipated an end to the stimulus.

But others have cast doubt on how far bond yields can rise given continued appetite for fixed income from funds. Mike Bell, global market strategist at J.P. Morgan Asset Management, said he believed that German 10-year bond yields could climb another 0.2 to 0.3 percentage point by year-end, while the euro could rise to $1.15. The 10-year bund yield traded at 0.363% on Wednesday, up from 0.247% at Monday’s close

Olivier de Larouzière, head of interest rates at Natixis Asset Management, said yield-hungry institutional investors had seen the selloff in eurozone bonds as a buying opportunity. He said his trading desk had seen flows from Japanese and French insurance companies scooping up long-dated French government bonds on Wednesday.

“As soon as you get a yield pickup, you get buyers, because investors are desperate for yield,” said Mr. de Larouzière.


—Tom Fairless, Sam Goldfarb and Paul Vieira contributed to this article.

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