Short-term sovereign debt has provided a haven for bond investors as longer-term securities endure a global selloff on signs of European economic growth and rising volatility.
In the U.S., yields on Treasury two-year notes, which are closely tied to expectations regarding Federal Reserve policy, barely budged amid a global bond-market rout this week. Yields on securities maturing in seven years or longer soared to the most this year along with European government bonds amid signs of faster growth in that region following the European Central Bank’s unprecedented stimulus, known as quantitative easing.
The short end of the government bond market has emerged relatively unscathed even as two-year yields rose Wednesday in 21 of the 24 developed markets tracked by Bloomberg. Sovereign debt maturing between one and three years has lost just 0.04 percent since April 15, compared with a 2.4 percent loss for issues due in seven to 10 years, according to Bank of America Merrill Lynch bond indexes.
“QE is working in Europe and therefore we should see a steeper curve with somewhat higher rates,” said Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York. “Europe posted slightly positive growth, slightly positive inflation. I’m not going to say it’s strong but it’s not negative anymore.”
Yields on U.K. maturities of five years and less rose by as much as six basis points Wednesday in New York, while long bonds rose by as much as 11 basis points. German shorter-term equivalents rose by as much as eight basis points, while 30-year bond yields rose 18 basis points.
The two-year Treasury yield added two basis points, or 0.02 percentage point, to 0.68 percent in New York, according to Bloomberg Bond Trader prices The 10-year yield gained 10 basis points to 2.37 percent.
The difference between U.S. two- and 10-year yields, known as the yield curve, reached 1.69 percentage points, the most since May 13. A steepening yield curve is typically seen by bond investors as a sign of rising economic growth and inflation.
While the U.S. central bank plans to raise interest rates this year, Fed Vice Chairman Stanley Fischer said June 1 the move in rates would be more of a “crawl” than a “liftoff.”
Shorter-term yields in Japan also climbed less than longer-term maturities.
“There isn’t a lot out there to really encourage your Fed liftoff view,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that trade with the Fed. “That is having an impact on the front end” while rising German yields have a bigger impact on longer-term securities.
The Fed has held its benchmark overnight lending rate at virtually zero since December 2008 as part of its arsenal of extraordinary accommodation intended to help spur economic growth by restraining borrowing costs. A Bloomberg survey in April showed economists forecast policy makers will increase the federal funds rate target in September for the first time since June 2006.