Bond Traders Suffer Worst Rout in Three Years as Selloff Deepens

(Bloomberg) -- After all central bankers have done since the financial crisis to prop up bond prices, it didn’t take much for them to send the global debt market reeling.

Bonds worldwide lost 2.9 percent this month through Oct. 27, according to the Bloomberg Barclays Global Aggregate Index, which tracks everything from sovereign obligations to mortgage-backed debt to corporate borrowings. The last time the bond world was dealt such a blow was May 2013, when then-Federal Reserve Chairman Ben S. Bernanke signaled the central bank might slow its unprecedented bond buying.

Europe led the losses that reverberated worldwide this week as signs of accelerating inflation and economic growth spurred speculation that the European Central Bank and its major counterparts are moving closer to curbing monetary stimulus, including asset purchases. The result is that investors are abandoning one of the year’s biggest trades -- a bet on higher-yielding, long-term bonds -- as they wake up to the limits of central-bank demand that drove bond yields to record lows as recently as July.

“Portfolios, banks, and hedge funds stocked up on these government bonds on the belief that global central banks would be buying them for years,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings in New York. “Now, there has been a shift in central-bank policy globally.’’

In a year in which global bonds have earned more than 6 percent, it’s been months since yields were this high in major economies. Yields on 10-year gilts reached 1.31 percent, the highest since June 23, the day of the U.K. vote to leave the European Union. Similar-maturity German bonds were set for their worst month since 2013, pushing yields to 0.217 percent, a level last seen in May. U.S. 10-year Treasury yields touched about 1.88 percent, the highest since May.

Turbulent Times

There’s potential for more turbulence ahead. Next week brings interest-rate decisions from the Bank of Japan, the Fed and the Bank of England. Then on Nov. 8, Americans go to the polls to choose a new president.

Partly to get ahead of all that, companies including yogurt-maker Danone SA and Honeywell International Inc. sold about $62 billion of bonds worldwide this week, the most since mid-September, according to data compiled by Bloomberg. Global corporate bonds lost 0.6 percent this week, sending the average yield on the notes to 2.39 percent, the highest since June, according to Bloomberg Barclays index data.

There are signs that investors welcomed the higher yields. Even as the U.S. auctioned $88 billion of notes this week amid the rout, most auction metrics painted a picture of orderly sales. For the five- and seven-year offerings, a measure of demand known as the bid-to-cover ratio matched or exceeded its average over the prior 10 auctions.

Buying In

“As you start to see yields back up, it will start to be interesting for many clients to start to buy into it,” Jim Keenan, global head of fundamental credit at BlackRock Inc., which oversees $5.1 trillion, said in an interview on Bloomberg Television.

Contributing to the repricing that’s swept fixed-income markets is mounting evidence that central banks’ historic stimulus efforts are finally paying off.

While the ECB is still projected to extend and likely tweak its asset-purchase program at the end of this year, conviction on the plan’s longevity has waned amid signs that global inflation is accelerating. 

A report Friday showed consumer prices in Germany rose this month at the fastest annual pace in two years. U.K. data Thursday showed Britain’s economy grew more than forecast in the third quarter. Earlier in the week, Bank of England Governor Mark Carney said there were limits to officials’ willingness to look past an overshoot of their inflation target, signaling a chance that stimulus, including a bond-buying program, might not be expanded.

And the U.S., the world’s largest economy, grew last quarter at the fastest pace in two years, the latest data showed Friday.

--With assistance from Anooja Debnath and Faris Khan To contact the reporters on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net, Claire Boston in New York at cboston6@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum