Global Plunge in Bond Yields Undercuts Fed Interest Rate Views

  • Average yield falls to 1.287%, versus record low of 1.284%
  • Four Fed presidents say they're open to considering June move

Global bond yields tumbled to near an all-time low as slow price growth and central-bank stimulus put the market at odds with Federal Reserve officials who are signaling another interest-rate increase may come as soon as their next policy meeting in June.

The average yield of the securities in Bank of America Corp.’s Global Broad Market Index slid to 1.287 percent Thursday. The record was 1.284 percent set in April, based on data going back to 1996. The bonds have returned 3.8 percent in 2016, versus about 1 percent for all of 2015.

Australia’s central bank cut its inflation forecast, sending three- and five-year yields to unprecedented lows. Japan’s 10-year benchmark, holding below zero, was within two basis points of the record. Australia is following the European Central Bank, which cut its inflation forecast in March. Last month, the Bank of Japan postponed the target date for meeting its 2 percent goal for consumer-price gains. German 10-year bunds gained this week for the first time in a month.

“The pain trade -- too many investors dislike long duration positions-- is for lower yields still,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London. “Right now bonds are gaining as risk assets look far less buoyant. By the next meeting the U.S. data will look slightly stronger, but the global financial conditions slightly worse and they’ll stay put again,” he said referring to the Fed’s next policy decision.

The yield on benchmark U.S. 10-year Treasuries was little changed at 1.74 percent as of 6:42 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 31/32.

Labor Data

The U.S. Labor Department reports on jobs and wage growth Friday. Payrolls data are projected to show a 200,000-worker increase for April, from a 215,000 gain in March. Average hourly earnings are forecast to be stable.

Four regional Fed presidents said they were open to considering an interest-rate increase in June. St. Louis Fed chief James Bullard, San Francisco’s John Williams, Robert Kaplan of Dallas and Atlanta’s Dennis Lockhart all stressed in separate remarks Thursday that policy would be data dependent and a move at the June 14-15 meeting of the Federal Open Market Committee is possible.

Traders are assigning 10 percent odds to the chance of a rate shift in June, futures contracts indicate.

“There is still very strong pressure for deflation globally,” said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has $50.3 billion in assets. “If the Fed tightens, people believe the pace will be very, very limited.” He’s betting on European government bonds, he said.

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