US government bonds steady after heaviest sell-off since March turmoil

US Treasuries steadied in European trade on Friday after the most turbulent day for the world’s biggest bond market since the height of coronavirus-induced ructions last March.

Five-year Treasuries, which were at the centre of a fierce rout in US government debt on Thursday, ticked higher in price on Friday. The yield slipped 0.06 percentage points to 0.76 per cent, after surging more than 0.2 percentage points in the previous session.

The 10-year Treasury yield also followed suit, slipping 0.06 percentage points to 1.47 per cent after jumping as high as 1.6085 per cent on Thursday.

"Yesterday proved to be nothing short of a rout in global markets, with the sell-off in sovereign bonds accelerating as investors looked forward to the prospect of a strengthening economy over the coming months," said Jim Reid, research strategist at Deutsche Bank.

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Tumult

The tumult in the bond market ricocheted into Wall Street stocks on Thursday, sending the Nasdaq Composite sinking 3.5 per cent, in a trend that spilled into European and Asian trading on Friday.

The Europe-wide Stoxx 600 lost 1.3 per cent in early trading. London’s FTSE 100 benchmark shed 0.9 per cent and Germany’s Xetra Dax dropped 1.2 per cent.

Bond market nerves were also visible in Asia-Pacific’s equity markets. Japan’s Topix index was down more than 3.2 per cent, while the S&P/ASX 200 of Australia’s blue-chip shares dropped by more than 2.3 per cent.

Hong Kong’s Hang Seng index shed 3.4 per cent and mainland China’s CSI 300 was down 2.4 per cent.

The equity volatility came as concerns grew among investors that the worldwide economic recovery from the Covid-19 pandemic could generate inflationary pressures, causing the US and other central banks to tighten monetary policies.

“With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President Biden’s fiscal package getting through the Congress, investors are now fixated on the risk of inflation and economic overheating,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

Investors’ focus is turning to how central banks will react to surging bond yields and concerns over asset price bubbles.

The Reserve Bank of Australia announced on Friday that it would make an unscheduled A$3 billion (€1.9 billion) purchase of three-year government bonds to defend its yield target at that maturity.

Government bond yields have risen sharply in Australia this year while the local currency is trading at a three-year high against the dollar as the country’s economic recovery from Covid-19 has gained momentum.

“At some point this could become a problem for the economic recovery and other asset prices,” said David Plank, an economist at ANZ.

In Australia, the yield on 10-year government bonds was flat at 1.843, but had surged 0.12 percentage points to 1.849 per cent during Asian trading, its highest level since April 2019.

Catalyst

Concerns are also increasing over central bank independence, with New Zealand’s government this week instructing rate-setters to take red-hot property prices into account when making policy.

Traders in Tokyo speculated that ructions in global markets could push the BOJ to step into bond and stock markets to prevent yields on the 10-year JGB from rising above 0.2 per cent and to support the Topix.

Selling early in the session in Tokyo had sent yields on Japan’s benchmark 10-year government bond to 0.178 per cent – the highest level since the Bank of Japan (BOJ) announced it would introduce a negative interest rate policy in early 2016. The yield later stabilised at 0.156 per cent.

Investors have come to believe that the BoJ will act to prevent 10-year JGBs from moving outside a range of roughly 20 basis points on either side of zero, analysts said.

Takeo Kamai, head of execution services at brokerage CLSA in Tokyo, said the drop in the Topix meant that it was all but certain that the BOJ would make a big purchase of exchange traded funds for the first time since January 28.

“They will do it but it won’t make that much difference. Really people are just following what the long and short-dated US Treasuries are doing,” said Kamai, adding that the recent surge in Japanese equities that took the Nikkei 225 index to 30-year highs had never been driven by a strong domestic catalyst.

“Japan was just part of the global euphoria, so when [ stocks] fall down, they fall down quickly,” he said. – Copyright The Financial Times Limited 2021