By Min Zeng
The roaring U.S. government bond market is suffering a mild
setback.
Bond prices dropped Wednesday, following the biggest one-day
selloff since November 2013 in the prior session. Investors took
chips off the table after a steep rally over the past month.
Traders said that the recent decline in bond yields has priced
in lots of downbeat news on global growth and that fresh monetary
stimulus from a number of global central banks so far this year may
provide a boost to the economy in the coming months.
In addition, a flurry of new corporate bond sales from
companies, including Apple Inc., attracted money out of Treasury
bonds because of their more-attractive yields. The Treasury debt
market also faces $64 billion of new supply next week, which also
weighed down bond prices.
In recent trading, the yield on the benchmark 10-year Treasury
note was 1.817%, compared with 1.781% Tuesday, according to
Tradeweb. Bond prices fall as their yields rise.
The yield touched 1.846% Wednesday morning, the highest intraday
level in two weeks.
Demand for haven Treasury bonds had soared in the past few
weeks, extending the market's rally since the start of 2014, as
worries grew over the global economic outlook and a deflation scare
in Europe. The 10-year yield has tumbled from 2.173% traded at the
end of 2014. Monday, it closed at 1.669%, the lowest level since
May 2013.
"We are at [yield] levels that are pricing in a lot of bad
outcomes," said Thomas Roth, executive director in the U.S.
government bond trading group at Mitsubishi UFJ Securities (USA)
Inc. in New York. "If the outcomes especially in Europe turn out to
be better than expected, then we are seriously mispriced and people
are going to scramble out of the door."
Wednesday, China's central bank cut by half a percentage point
the amount of deposits set aside by commercial banks in case of
financial trouble. The step effectively frees up about 500 billion
yuan, or about $81 billion, in additional funds that banks can now
lend out.
Central banks in Australia, Canada, Denmark and Switzerland have
cut interest rates so far this year. The European Central Bank
announced last month it will start buying bonds--including
government bonds in the eurozone--in March to curb deflation, a
toxic economic cycle of falling consumer prices and reduced
spending.
"Global deflation worries diminish somewhat with [loose] global
central bank policy," said Eric Stein, co-director of global income
at money manager Eaton Vance Management, which has $296 billion in
assets.
Mr. Stein added that fear has abated over Greece possibly
departing the eurozone, and U.S. crude oil prices have rebounded
from the lowest level since 2009. All these factors have been "very
consistent with rising Treasury yields," he said.
Some investors and traders expect the selloff in Treasury bonds
won't last long.
The global growth outlook remains worrisome and "oil has not
bottomed," said Tom di Galoma, head of rates and credit trading in
New York at ED & F Man Capital Markets. "The longer-term trend
is till in place for bond yields to make new lows in the coming
months."
Another support for Treasurys comes from their more-attractive
yields compared with government bonds in Europe and Japan. Analysts
said money managers in Europe and Asia will be drawn to U.S. bonds.
A stronger U.S. dollar--which has rallied against the euro over the
past year--has enabled foreign buyers to pick up extra returns on
their investments in U.S. financial assets.
Wednesday, the yield on the 10-year German government bond was
0.369%, and the yield on the 10-year Japanese government bond was
0.375%. The 10-year U.K. government bond yielded 1.534%.
"U.S. Treasury bonds are still the best value when compared to
other sovereigns," said Larry Milstein, head of government and
agency trading at R.W. Pressprich & Co. in New York. "I think
we will see dip buyers."
Write to Min Zeng at min.zeng@wsj.com
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