Global Bond Markets Unwind Aggressively on Fiscal Promises
Treasuries Post Biggest Drop Since 2016 as Pendulum Swings Back
(Bloomberg) -- Global bond markets snapped back aggressively from their phenomenal rally over the past week on bets that governments will introduce fiscal measures to deal with the economic fallout from the coronavirus.
Treasuries led a sell-off in haven assets -- with 10-year yields poised for the biggest jump in over three years -- as stocks and oil markets rebounded from their rout Monday. The moves spread to Europe, with German bond yields surging higher and U.K. short-end rates moving further away from the 0% threshold that they had breached for the first time ever.
Investors have been calling for fiscal measures as the virus contagion worsens, crimping supply chains and denting consumer sentiment. U.S. President Donald Trump flagged the possibility of a payroll tax cut, while Australia said it was close to a stimulus package. Italy may increase its stimulus to around 10 billion euros ($11.4 billion), according to two officials, who declined to be named discussing confidential deliberations.
“We were bound to have a bounce in sentiment at some point as support measures get announced,” said Antoine Bouvet, a senior rates strategist at ING Groep NV in London. “There is no saying how long this will last but in this instance I would guess until we get more details on the size of the U.S. fiscal package.”
There were signs of investors unwinding their hedges for a further deterioration in trading conditions. In currency markets, the yen tumbled by the most since 2014, while the FRA/OIS spread, a gauge of banking sector risk, collapsed from the highest level since 2011. The Schatz asset swap spread -- another popular disaster hedge -- also narrowed drastically.
“Haven assets have been sold broadly due to high hopes on Trump’s economic measures,” said Shinichiro Kadota, a foreign-exchange & rates strategist at Barclays Plc in Tokyo. “The yen could be sold further if the market can be convinced that the package could actually help the economy.”
The yen dropped 2.8% to 105.18 per dollar, giving up most of the gains from the previous day’s blistering rally.
Treasuries were sold across the curve, with the 10-year futures hitting limit down to trigger circuit breakers. U.S. bonds had gone on a record-setting rally on Monday, with the entire curve dropping under 0.7%.
Do Something
The International Monetary Fund’s chief economist urged policy makers to implement targeted fiscal, monetary and financial market measures in response to the coronavirus outbreak.
The European Central Bank is set to give its latest decision on interest rates Thursday, with traders nearly pricing in a full interest-rate cut. In the U.K., Prime Minister Boris Johnson could choose to announce a package of fiscal measures. Bond dealers in the country expect the biggest surge in issuance in over a decade.
New Zealand’s finance minister said Tuesday the central bank has room to move on interest rates. In Japan, Jiji reported that the ruling Liberal Democratic Party sees a need for as much as 20 trillion yen ($191 billion) worth of stimulus in April or May.
“Discussions on fiscal stimulus are getting louder,” said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “That, along with the fact that bonds have been overbought, has triggered the reversal.”
Yields on Japan’s 10-year bonds climbed as much as 14 basis points, and the rate on the benchmark in Australia surged by 18 basis points.
Treasury 10-year yields climbed almost 20 basis points to 0.73%, rebounding from the 22 basis point drop on Monday.
“Treasuries will remain extremely volatile,” said Masahiko Loo, a fixed-income portfolio manager at AllianceBernstein Japan Ltd. Still, “yields are expected to stay under downward pressure as long as concerns over the coronavirus remain in place.”
--With assistance from Stephen Spratt.
To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net;John Ainger in Brussels at jainger@bloomberg.net;Chikafumi Hodo in Tokyo at chodo@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Dana El Baltaji
©2020 Bloomberg L.P.