Yellen Sparks Bond Tantrum as Yields Soar From Sydney to Tokyo

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U.S. Fed Chair Janet Yellen
Janet Yellen, chair of the U.S. Federal Reserve, listens to a question during a discussion with Christine Lagarde, managing director of the International Monetary Fund (IMF), not pictured, at an Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C. on May 6. Photographer: Andrew Harrer/Bloomberg

Japanese bonds fell the most in almost two years and Australian government securities slid for an eighth day in the latest leg of a global debt-market rout.

With the Federal Reserve poised to raise interest rates and Chair Janet Yellen warning long-term yields are low, the U.S. 10-year yield jumped to a two-month high of 2.26 percent Wednesday. Investors in Germany and Japan are balking at yields that are at least 160 basis points below what they can get in the U.S. New Zealand failed to sell inflation-linked bonds Thursday when investors demanded higher yields than the government would pay.

“There’s a perception that the bull run in fixed income is coming to a close,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. Investors “think that the raising of rates is coming.” The company is one of the 22 primary dealers that trade directly with the Fed.

Japan’s 10-year yield jumped 7.5 basis points to 0.425 percent as of 6:37 a.m. in London, the biggest increase since May 2013, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The 0.4 percent bond due in March 2025 fell 0.712 yen to 99.669. The market opened Thursday following a three-day holiday.

Australia’s yield climbed seven basis points to 3 percent after reaching 3.03 percent, the highest since December. Germany’s benchmark advanced to 0.6 percent Wednesday, the most this year.

Record Low

Aussie bonds are falling even after the Reserve Bank of Australia cut its benchmark to a record low of 2 percent this week. Central bank debt-purchase programs in Japan and Europe haven’t been enough to stem the rout.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index yielded 1.31 percent on average, climbing from the all-time low of 1.08 percent set Feb. 2. The yield has averaged 2.36 percent in the past decade.

The securities in the index have handed investors a loss of 2 percent since the February reversal.

Treasuries were little changed Thursday in Asia trading. U.S. yields have risen enough to attract some investors, Nomura’s Gorman said.

The global bond rout is evoking memories of the so-called taper tantrum of 2013, when then-Fed Chairman Ben S. Bernanke surprised markets by appearing to signal the central bank was planning to cut the bond purchases being conducted at the time.

‘Very Low’

“Long-term interest rates are at very low levels,” Yellen said Wednesday. “We could see a sharp jump in long-term rates” after the central bank starts raising borrowing costs.

Yields are rising “with a vengeance,” said Bill Bovingdon, the Sydney-based chief investment officer at Altius Asset Management Pty, which invests the equivalent of $518.9 million. “It is worldwide.”

New Zealand opted against selling NZ$100 million ($75 million) of inflation-linked notes due in 2035 at auction after investors demanded yields as high as 2.5 percent, according to the Debt Management Office’s website.

The government had planned to sell an additional amount of an existing bond. The yield of the outstanding securities climbed 17 basis points to 2.20 percent.

“In the middle of a bond rout like this, it’s not a great time to be doing an auction,” Bovingdon said.

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