Bond Report: U.S. government bonds rally amid global stock-market rout

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Investors fled to the perceived safety of U.S. government bonds early Thursday in New York, bringing a momentary halt to a rapid climb in yields, following the worst one-day decline for equity benchmarks in months in the prior session.

The 10-year Treasury note yield TMUBMUSD10Y, +0.45% fell 6.3 basis points to 3.158%, pulling back from a level near its seven-year intraday high. The 2-year note yield TMUBMUSD02Y, +0.44% gave up 3.7 basis points to 2.844%, while the 30-year bond yield TMUBMUSD30Y, +0.56% declined by 5.7 basis points to 3.340%, receding from a four-year high that was put in yesterday. Bond prices move in the opposite direction of yields.

Bond rates globally also saw a pullback, with the yield for the German 10-year bond TMBMKDE-10Y, -4.39% known as the bund, falling to 0.510%, compared with 0.566% a day ago, according to FactSet data.

On Wednesday, the Dow Jones Industrial Average DJIA, -3.15% tumbled more than 830 points and the S&P 500 index SPX, -3.29% fell 3.3% to mark the benchmarks’ steepest single-session fall since Feb. 8, while the technology-laden Nasdaq Composite Index COMP, -4.08%  skidded 4.1% lower for its worst day since the U.K.’s vote to exit from the European Union, known as Brexit, in June 2016.

The stock carnage has partly been attributed to the rapid rise of the sovereign debt yields in the U.S., which investors have said has forced a broad recalibration of stock values when compared against so-called risk-free government debt.

A litany of other anxieties, including the threat of escalating trade tensions between the U.S. and China, which has mostly loomed in the background, and worries of a global growth slowdown after the International Monetary Fund cut its growth forecast for the global economy in 2018 and 2019 to 3.7%—0.2% below its prior estimate for both years, have made the markets vulnerable to a downturn, market participants said.

On Wednesday, President Donald Trump echoed concerns about the possibility of a policy mistake by the Federal Reserve, which he believed may also be undermining economic growth prospects. “I think the Fed is making a policy error. It’s so tight, I think the Fed has gone crazy,” said Trump, before a rally in Erie, Pa.

Check out: What Trump’s tirade against ‘loco’ Fed means for markets

The Fed, led by Chairman Jerome Powell, has lifted interest rates thrice in 2018 and is expected to do so a fourth time in December, as the central bank attempts to normalize rates from crisis-era levels.

Against that backdrop, yields have been advancing and investors have been reluctant to buy new bonds over fears that rates have further room to rise, which would inflict more losses on traders.

“Yesterday, bond auctions at long maturities in Germany and the US received modest demand, suggesting that appetite for long-term government paper is not particularly strong,” wrote analysts at UniCredit in a Thursday research note.

“However, following the acceleration in the stock selloff (S&P 500: -3.3%, Nasdaq: -4.1%) and the downward correction in UST yields, investors’ appetite might reverse soon,” they wrote.

In the past few sessions, bond prices and stocks have been falling in tandem, which isn’t a normal occurrence, because bonds tend to be bought in favor of risky assets like stocks in times of worry.

Accelerating inflation expectations amid a recent climb in oil prices, with Brent crude-oil LCOZ8, -1.88% and those for U.S. benchmark contract, West Texas Intermediate CLX8, -1.71% have also been on investors’ radar. Rising inflation can add to a rise in yields because signs of inflation erode the fixed value of bonds and can prompt the Fed to pick up its pace of rate increases, both factors that can cause a selloff in government debt.

Genuine signs of a rise in inflation, however, haven’t been evident.

With that in mind, bond investors will await key read of inflation, the consumer-price index for September, which is forecast for a rise of 0.2%, based on average economists’ expectations polled by MarketWatch. That report is due at 8:30 a.m. Eastern Time along with weekly jobless claims.

An auction of 30-year Treasury bonds are also slated for 1 p.m. Eastern, which could help determine the market’s appetite for long-date government paper as investors have bought around $60 billion of newly issued U.S. debt, split between the 3-year and 10-year maturities, over the past few sessions.

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