Global Bond Sell-Off on China Trade Thaw Revives ‘Tantrum’ Fears
A 2017 50 subject uncut sheet of $1 dollar notes bearing the name of U.S. Treasury Secretary Steven Mnuchin. (Photographer: Andrew Harrer/Bloomberg)

Global Bond Sell-Off on China Trade Thaw Revives ‘Tantrum’ Fears

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(Bloomberg) -- A sell-off across global bond markets deepened amid optimism over the potential removal of U.S. tariffs on Chinese goods, while stronger-than-expected data on the U.S. services sector also dented investors’ appetite for haven assets.

Treasuries slumped along with European and Japanese bonds as signs that trade tensions between the world’s two largest economies may be easing. The slide buoyed the 10-year Treasury yield, driving the global interest-rate benchmark more than 40 basis points above its 2019 low. In Europe, where sovereign yields hit record lows earlier this year on fears of recession, French rates climbed to near positive territory for the first time since July.

Global Bond Sell-Off on China Trade Thaw Revives ‘Tantrum’ Fears

For some, the bond declines bear a resemblance to the market “tantrum” of 2015, when German borrowing costs soared after the European Central Bank indicated it wouldn’t cut rates further. Back then, the sell-off in bunds saw German rates soar from as low as 0.05% to around 1.06% in less than two months.

The moves so far aren’t that extreme, but some market observers have suggested there are echoes. This time around, the Federal Reserve has played a similar role to the 2015-vintage ECB, signaling that it is taking a pause, while Australia’s central bank held rates Tuesday and Sweden’s Riksbank is determined to hike by the end of the year.

“It is starting to smell a bit like the sell-off in the spring of 2015, but it is actually easier to put some factors behind it this time,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “Pricing is no longer for lower rates and momentum has shifted.”

If so, it would mark a major turnaround for bond markets that have been dominated by growing demand for haven securities -- such as U.S. Treasuries and German bunds -- as well as a hunt for yields. That has seen investors dive into riskier assets such as Italian and Greek bonds, as well as extending maturities of their holdings and taking on greater credit risk.

The yield on 10-year Treasuries climbed as much as 9 basis points to 1.87% Tuesday, closing in on the September high of 1.90%. French 10-year yields came within a basis point of breaching above zero, a level unseen since July, while the equivalent German rate touched -0.30%, the highest in more than three months.

In Japan, 10-year yields rose six basis points to -0.125% as the Bank of Japan cut debt purchases for the first time in more than a month, and in a catch-up move following a public holiday Monday.

The sell-off came as China’s President Xi Jinping stressed his country’s commitment to the global trading order as his trade negotiators wrangle with the U.S. over rolling back punitive tariffs ahead of a phase one deal. The slump in Treasuries received further impetus after the Institute for Supply Management’s services gauge beat expectations, spurring traders to dial back expectations for Fed easing.

Investors also showed signs of struggling to digest a deluge of supply, including $38 billion of U.S. three-year notes set to be auctioned, German inflation-linked securities and a euro-denominated bond from China on Tuesday. In corporate debt, more than 20 tranches are hitting the European market, including from Royal Dutch Shell Plc and Lloyds Banking Group Plc, making it the busiest day of issuance since at least mid-September.

©2019 Bloomberg L.P.

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