Global bond markets posted their biggest monthly losses in nine years in May as the U.S. dollar rallied and stocks reached record highs amid speculation a strengthening U.S. economy will allow the Federal Reserve to reduce its monetary stimulus.
The over $40 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market Index fell 1.5 percent on average, led by a 2 percent drop in Treasuries. The MSCI World Index lost 0.3 percent while the Standard & Poor’s 500 reached a record high. The U.S. Dollar Index jumped 2 percent as the greenback gained versus all its major peers. The S&P GSCI Total Return Index of metals, fuels and agricultural products dropped 1.5 percent a month after falling the most since May 2012.
Employment gains and increases in housing and consumer confidence suggested the recovery in the U.S. economy, the world’s largest, is gaining momentum, prompting traders to increase bets the Fed will scale back its $85 billion in monthly debt purchases later this year. The Organization for Economic Cooperation and Development predicts faster global economic growth, led by the U.S. and Japan.
“Investors’ attempt to access what the Fed will do with its bond-buying program has been pretty central to the performance of all asset classes,” Neil Mackinnon, a global macro strategist at VTB Capital Plc in London, said May 30 in a telephone interview. “The markets are very sensitive to the idea that the Fed might ease back on their debt purchases.”
Yields on U.S. Treasuries, German bunds and U.K. gilts are all forecast to rise by year-end from current levels, while those in Japan may fall, according to separate surveys of analysts by Bloomberg News.
Fed Chairman Ben S. Bernanke said during a response to questions following Congressional testimony on May 22 that the central bank could consider reducing the amount of Treasuries and mortgage debt it buys within “the next few meetings” if officials see signs of sustained improvement in the labor market.
The OECD sees growth among all its member countries accelerating to 2.3 percent next year from 1.2 percent this year. China, which isn’t part of the group, will expand 8.4 percent in 2014 after growth of 7.8 percent this year, according to the OECD report.
“The tone of the economic data has certainly been getting better and that is certainly one of the reasons why yields are pushing a little bit higher along with this talk of a Fed taper of debt purchases,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, said in a May 29 interview on Bloomberg Radio.
Last month’s losses in the Global Broad Market Index of bonds trimmed its year-to-date returns to 0.13 percent, including reinvested interest. While the effective yield rose to 1.83 percent, from 1.53 percent on April 30.
Bank of America Merrill Lynch’s index of sovereign bonds lost 1.63 percent, as Treasuries fell 2 percent and Japanese government bonds plunged 1.25 percent, the most since April 2008.
Corporate bonds globally from the riskiest to most-creditworthy borrowers dropped 1.35 percent, the most since November 2011. Investment-grade notes lost 1.55 percent as junk bonds declined 0.48 percent, the first monthly loss in a year.
The MSCI World Index’s loss in May trimmed this year’s gains to 10 percent. The biggest stock-market gains were found in Venezuela, where the main equities index soared 22 percent. At the opposite end, Argentina’s Merval Index slid 9.3 percent.
Germany’s DAX rose the most among developed markets, gaining 5.5 percent as carmakers rallied. The Portugal PSI 20 Index dropped 5 percent for the worst performance as Banco Espirito Santo SA slumped amid an unexpected quarterly loss.
Japan’s Topix slid 2.5 percent, trimming gains for the year to 32 percent, after rising bond yields spurred losses in financial shares. The index has entered a correction by falling more than 10 percent since May 22.
The S&P 500 reached an all-time high close of 1,669.16 on May 21 and rose 2.1 percent in its seventh-straight monthly gain, the longest stretch since September 2009. The rally has lifted the index 14 percent this year and pushed its dividend yield down to 2.08 percent, below the 10-year Treasury note’s yield for the first time in 13 months.
“The market is a power house,” Bruce Bittles, the chief investment strategist at Milwaukee-based RW Baird & Co., which oversees about $100 billion, said in a May 30 phone interview. “My biggest concern is a lot of people are being pushed into the market that really don’t want to be here and will exit at the first sign of trouble.”
In the foreign-exchange market, IntercontinentalExchange Inc.’s Dollar Index rebounded from a 1.5 percent drop in April on optimism the Fed may soon slow the pace at which it prints the currency to buy bonds. The gauge measures the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona.
The Dollar Index lost 0.2 percent to 83.239 as of 1:19 p.m. in Tokyo. The euro rose 0.1 percent to $1.3008 after falling 1.3 percent in May.
China’s yuan was the only currency to gain in May versus the greenback among 31 major counterparts tracked by Bloomberg. The yuan appreciated 0.5 percent during the month to 6.1345 per dollar.
The biggest losers against the U.S. currency were the South African Rand, sliding 11 percent; the Australian dollar, losing 7.7 percent; the Brazilian Real, falling 6.5 percent; and the New Zealand dollar, depreciating 7.2 percent.
Australia’s dollar tumbled the most since September 2011, weakening to 95.71 U.S. cents. Japan’s currency slid 3 percent, bring this year’s losses to 14 percent as the Bank of Japan doubled its bond-buying program and inflation target to end a protracted period of deflation.
“Some of the Chinese data hasn’t been as resilient as some had thought,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, during a telephone interview on May 30. “Concerns about the China story have been rising, especially as commodity prices are moving lower on the back of that, and that hampered the Australian dollar.”
China’s slowdown is reverberating in Australia on the prospects for reduced trade between the nations. Manufacturing in China, the nation’s biggest trade partner, contracted in May for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.
The S&P GSCI gauge of 24 commodities declined in May after falling 4.7 percent in April. It slid 5.6 percent this year through last month as slowing growth in China crimped demand for raw materials.
“Commodities are underperforming because of concern about growth, especially in China,” Russell Silberston, a London-based money manager at Investec Asset Management, said in a phone interview on May 28. The company manages $105 billion.
Cocoa fell 7.5 percent, the most this year, as stockpiles in warehouses monitored by ICE Futures U.S. expanded for a sixth consecutive month, the longest streak in three years. At the same time, soybeans jumped 7.9 percent, the most since July, as farmers in the U.S. Midwest withheld dwindling supplies from last year’s drought-reduced harvest.
Gold futures on the Comex in New York fell 5.4 percent, after tumbling 7.8 percent in April when the metal entered a bear market. Copper on the London Metal Exchange climbed 3.6 percent, the first monthly gain since January, as some traders who were betting on lower prices bought back contracts after mining was suspended in Indonesia at Freeport-McMoRan Copper & Gold Inc.’s Grasberg, the world’s second-largest copper mine.
“Agriculture markets are generally seeing ample supply keeping a lid on prices apart from some old crops where inventories are low from last summer’s much-reduced harvest,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “Precious metals are still struggling to come to terms with higher bond rates and subdued inflation.”
Brent oil dropped 1.9 percent in May to $100.39 a barrel, the fourth-consecutive monthly decline. It may rebound to about $110 a barrel in the next few months, Hansen said.
“Geo-political worries are primarily priced through Brent as U.S. inventories of crude oil are at a record high but not easily exported so any supply worries impacts Brent the most,” Hansen said.