Worst two months in two years for bond market
Worst two months in two years for bond markets
By Jennifer Hughesin New York
Published: April 29 2006 03:00 | Last updated: April 29 2006 03:00. Copyright by The Financial Times
Government bond markets have suffered their worst two-month period in two years as investors struggle to divine the timing and extent of future interest rate moves.
Preliminary data from Lehman Brothers indicates March and April produced the worst absolute returns since April and May 2004, when the markets were readying for the US Federal Reserve to begin raising rates. After a 0.9 per cent drop in March, global bond markets are on course for a loss of about 0.7 per cent this month.
This fed into wider gloom. Lehman's US Aggregate Bond Index is off 1.2 per cent this year, while the Pan-Europe index is down 2.7 per cent and Asia-Pacific indices have lost 1.3 per cent.
This week, Treasuries led world markets. Benchmark 10-year yields posted a series of four-year highs as strong data fuelled market speculation that, in addition toan already expected quarter-point rate rise in May, the Fed could continue with another rise to 5.25 per cent at its June meeting.
But that turned round on Thursday when Ben Bernanke, Fed chairman, wrong-footed the market and hinted at an impending pause in rate rises by the central bank's Federal Open Market Committee.
Whether a pause means just that or in fact an end was hotly debated in the market. Investors expecting an end, and betting on a resulting steepening of the yield curve, won the day.
Traders positioning for steepeners are betting that rate-sensitive, short-dated yields will fall faster than longer-dated ones because they believe it will become clearer that the next move in rates will be down.
Yesterday, the 10-year yielded 5.097 per cent, up from 5.025 per cent as the week began, but off a peak of 5.145 per cent.
In Germany, Bund yields pushed above 4 per cent for the first time in 18 months, helped by a combination of hawkish comments from central bankers and strong data.
New numbers yesterday added to the general mood, showing an unexpectedly sharp jump in inflation, while separate money supply data stoked rate rise expectations. The EuropeanCentral Bank meets next week, and investors are nervous.
The Bund yesterday yielded 3.966 per cent, up from 3.938 per cent onMonday but off a high of 4.033 per cent on Thursday.
UK markets tracked the eurozone, and the 10-year gilt yield hit a year-high at 4.72 per cent on Thursday, but was back at 4.645 per cent yesterday.
Japanese government bond investors initially tried to resist the rise in yields elsewhere as they waited for the Bank of Japan's semi-annual economic outlook yesterday to gauge the timing of the first interest rate rises in years.
But the market gave into the selling mood aheadof the report, helping10-year yields touch 2 per cent from 1.885 per cent on Monday.
The yield was back at1.930 per cent yesterday.
By Jennifer Hughesin New York
Published: April 29 2006 03:00 | Last updated: April 29 2006 03:00. Copyright by The Financial Times
Government bond markets have suffered their worst two-month period in two years as investors struggle to divine the timing and extent of future interest rate moves.
Preliminary data from Lehman Brothers indicates March and April produced the worst absolute returns since April and May 2004, when the markets were readying for the US Federal Reserve to begin raising rates. After a 0.9 per cent drop in March, global bond markets are on course for a loss of about 0.7 per cent this month.
This fed into wider gloom. Lehman's US Aggregate Bond Index is off 1.2 per cent this year, while the Pan-Europe index is down 2.7 per cent and Asia-Pacific indices have lost 1.3 per cent.
This week, Treasuries led world markets. Benchmark 10-year yields posted a series of four-year highs as strong data fuelled market speculation that, in addition toan already expected quarter-point rate rise in May, the Fed could continue with another rise to 5.25 per cent at its June meeting.
But that turned round on Thursday when Ben Bernanke, Fed chairman, wrong-footed the market and hinted at an impending pause in rate rises by the central bank's Federal Open Market Committee.
Whether a pause means just that or in fact an end was hotly debated in the market. Investors expecting an end, and betting on a resulting steepening of the yield curve, won the day.
Traders positioning for steepeners are betting that rate-sensitive, short-dated yields will fall faster than longer-dated ones because they believe it will become clearer that the next move in rates will be down.
Yesterday, the 10-year yielded 5.097 per cent, up from 5.025 per cent as the week began, but off a peak of 5.145 per cent.
In Germany, Bund yields pushed above 4 per cent for the first time in 18 months, helped by a combination of hawkish comments from central bankers and strong data.
New numbers yesterday added to the general mood, showing an unexpectedly sharp jump in inflation, while separate money supply data stoked rate rise expectations. The EuropeanCentral Bank meets next week, and investors are nervous.
The Bund yesterday yielded 3.966 per cent, up from 3.938 per cent onMonday but off a high of 4.033 per cent on Thursday.
UK markets tracked the eurozone, and the 10-year gilt yield hit a year-high at 4.72 per cent on Thursday, but was back at 4.645 per cent yesterday.
Japanese government bond investors initially tried to resist the rise in yields elsewhere as they waited for the Bank of Japan's semi-annual economic outlook yesterday to gauge the timing of the first interest rate rises in years.
But the market gave into the selling mood aheadof the report, helping10-year yields touch 2 per cent from 1.885 per cent on Monday.
The yield was back at1.930 per cent yesterday.
posted by Carlos T Mock at 9:27 AM
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