Government bonds worldwide advanced this week as a surging dollar sparked warnings from Federal Reserve officials that the stronger currency may hamper the U.S. economic recovery.
Treasury 10-year notes fluctuated as a report showed U.S. economic growth in the second quarter matched the median forecast in a Bloomberg survey. The Bloomberg Global Developed Sovereign Bond Index headed for its first weekly gain this month, buoyed by speculation weak economic growth in Europe and Japan will spur policy makers there to maintain stimulative monetary policy. Yields attracted investors after climbing last week when Fed policy makers increased their estimate for how far they’ll raise interest rates next year.
“Bonds rallied again as the market is nervous about the global economic outlook, which means the Federal Reserve may have to delay its rate increase,” said Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “Recent messages from Fed policy makers are mixed. The strong dollar may damp U.S. growth and attract more money into U.S. Treasuries, putting further downward pressure on their yields.”
Treasury 10-year yields were little changed at 2.50 percent as of 8:36 a.m. New York time, according to Bloomberg Bond Trader data. The rate rose to 2.65 percent on Sept. 19, the highest since July 7. It has dropped eight basis points, or 0.08 percentage point, this week.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, climbed to 1064.81 today, the highest level since June 2010.
Gross domestic product grew at a revised 4.6 percent annualized rate in the April-June period, up from a previous estimate of 4.2 percent, Commerce Department data showed today in Washington. The increase matched the median forecast of 81 economists surveyed by Bloomberg and followed a 2.1 percent decline in the first three months of the year.
The Bloomberg Global Developed Sovereign Bond Index advanced 0.2 percent this week, trimming September’s decline to 2.7 percent.
Yields on Japan’s 10-year debt dropped five basis points this week to 0.515 percent, on Australia’s fell 24 basis points to 3.49 percent and on U.K. gilts declined 11 basis points to 2.43 percent.
Germany’s consumer confidence index dropped to 8.3 for October from 8.6, the lowest since February, according to a survey published today by Nuremberg-based GfK. Japan’s inflation slowed more than economists forecast in August, highlighting the risks facing Bank of Japan Governor Haruhiko Kuroda in his push for prices to rise 2 percent.
German 10-year yields have fallen nine basis points this week to 0.95 percent.
The dollar rally may slow exports in coming months, Fed Bank of Atlanta President Dennis Lockhart said yesterday. New York Fed President William C. Dudley said this week if the dollar were to strengthen a lot it may hamper the central bank’s efforts to spur growth.
Fed officials last week boosted their median estimate for the benchmark interest rate for the end of 2015 to 1.375 percent, compared with 1.125 percent in June. Policy makers have kept their target for the rate, which banks charge each other on overnight loans, close to zero since 2008.
Treasury investors are only prepared for a Fed rate of about 1 percent by the end of next year, said Tomohisa Fujiki, head of interest-rate strategy in Japan at BNP Paribas SA, whose New York unit is one of the 22 primary dealers that trade directly with the Fed. Short-term Treasuries, those most sensitive to what the central bank does with its main rate, are most vulnerable, according to Fujiki.
“Yields will go higher,” he said in an interview in Singapore. “If the Fed decides on such aggressive moves compared to what the market is currently pricing in, obviously the short-term sector could be hurt most.”
Prospects for higher rates have been supported by data showing momentum in the U.S. economy is picking up. Gross domestic product in the second quarter rose at a 4.6 percent annualized rate, higher than a previous estimate of 4.2 percent, according to the median forecast in a Bloomberg News survey of analysts. That would be the fastest pace since 2011.
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