Bonds Worldwide Pull Out of Tailspin on Growth Concern

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.

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 high 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 dropped four basis points, or 0.04 percentage point, this week to 2.54 percent as of 10:05 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.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, climbed to 1064.92 today, the highest level since June 2010.

Global Rally

Government debt gained around the world this week, driving the Bloomberg Global Developed Sovereign Bond Index up 0.2 percent to trim September’s decline to 2.7 percent.

German 10-year yields extended declines today after a consumer confidence index dropped to 8.3 for October from 8.6, the lowest since February, according to a survey published by Nuremberg-based GfK. Yields fell seven basis points on the week to 0.97 percent.

Japan’s 10-year debt yields dropped as 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. On the week, yields slid five basis points to 0.515 percent.

Australia’s 10-year yields tumbled 24 basis points to 3.49 percent and U.K. gilt yields declined 11 basis points to 2.43 percent.

Yield Chase

U.S. debt gained this week as higher relative yields to Group of Seven counterparts and a strengthening dollar burnished the appeal of U.S. government securities to international investors.

Benchmark 10-year notes yielded 89 basis points more than G-7 peers after the gap reached 92 on Sept. 17, the widest since June 2007.

The prospects of tighter Fed monetary policy has helped the dollar appreciate this quarter against all 16 of its major peers tracked by Bloomberg. That’s transformed losses into gains for foreign holders of U.S. Treasuries, who own $6 trillion worth.

“The dollar is very attractive right now -- we’re looking like we’re the growing economy,” Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York, said Sept. 25. “Higher rates look like they’re on the horizon. The majority of people are moving assets into the dollar.”

The greenback rally may slow exports in coming months, Fed Bank of Atlanta President Dennis Lockhart warned 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.

‘Higher’ Yields

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.”

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