ND: Government Bonds in U.S., Germany, and U.K. Sell Off as Fears Ease
Investors flocked out of government bonds in the U.S., Germany and the U.K. on Tuesday as riskier assets stabilized from a recent rout, sending the yield on the benchmark 10-year Treasury note back above 2%.
Fears over China's slowing economy and stock-market turmoil had heightened anxiety over the global economic outlook in the past few days, fueling a broad selloff in global stocks, commodities and emerging-market currencies.
On Tuesday, China cut interest rates following a 7.6% decline in the nation's benchmark stock index, which helped soothe fears in global markets. Meanwhile, a gauge of consumer confidence climbed in the U.S., signaling that Americans remain upbeat on the growth outlook despite the recent market carnage.
"It seems that, for developed markets, at least, the worst of the pain is behind," said Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott. "The most recent round of selling was likely more about risk aversion than economic expectations."
David Ader, head of government bond strategy at CRT Capital, remains cautious. "Our sense is that the sort of panic we've just seen is hardly over," he said. "One day does not a market make."
In recent trading, the yield on the 10-year Treasury note was 2.091%, compared with 1.997% on Monday, according to Tradeweb. Yields rise as prices fall.
The yield, a foundation for global finance and a gauge of investors' sentiment toward growth and inflation, closed below 2% Monday for the first time since April.
In Germany, the 10-year government bond yield jumped by 0.15 percentage point to 0.729%. The yield on the 10-year government bond in the U.K. increased by 0.09 percentage point to 1.886%. Stocks in Europe and the U.S. rallied. The Japanese yen and the Swiss franc, considered as haven in the foreign-exchange market, sold off. The yen was more than 1% weaker against the dollar Tuesday.
Whether the improving sentiment in stocks would last hinges on whether China's actions have lasting power, traders say. Some investors say the selloff in riskier markets has been overdone because the U.S. economy has been strengthening and they aren't convinced that market turmoil and China's troubles would push the U.S. into a recession. Some money managers see the selloff in corporate bonds and stocks as a buying opportunity.
Growing market volatility and tumbling inflation expectations are complicating the Federal Reserve's plan in raising interest rates for the first time since 2006. Expectations for the Fed to tighten policy next month have pulled back over the past few days.
Fed-funds futures, used by investors and traders to place bets on central- bank policy, showed Tuesday that investors and traders see a 21% likelihood of a rate increase at the Fed's next meeting in September, according to data from the CME Group. A couple of weeks ago, the odds were around 50%.
Should stock markets stabilize from here, analysts say, the Fed could still take a small step in moving away from its crisis-era monetary policy.
The Fed's policy outlook hinges on upcoming data releases. Key among them is the nonfarm jobs report for August that is due to be released in early September. Jobs growth has been solid this year and consumer spending has picked up some momentum.
Federal Reserve Bank of Atlanta President Dennis Lockhart stuck to his guns Monday, saying he still expects the U.S. central bank to raise short-term interest rates in the next few months, even as he acknowledged stresses facing the U.S. economy and financial markets were making the outlook less certain.
Ashish Shah, head of global credit at AllianceBernstein, which has $486 billion assets under management, said it might be better off for markets if the Fed raises rates in September and signals a very gradual cycle. While many are worried that a rate increase could rattle markets, Mr. Shah says at least investors can "check this item off" their list because the uncertainty over the timing of a rate increase has helped fuel wider price swings in markets.
