Bond Traders Burned by Complacency as Treasuries Tumble on ECB

Updated on
  • Central bank leaves interest rates, asset purchases unchanged
  • U.S. 30-year bond yields climb by the most in five weeks

Bond investors got a painful lesson in complacency as Treasuries tumbled after European Central Bank President Mario Draghi left interest rates unchanged and played down the need to commit to additional stimulus.

Treasury 30-year bonds fell by the most in five weeks as the ECB’s move was seen as crimping overseas demand for longer-dated U.S. debt, which offers some of the highest sovereign yields. A gauge of the yield curve widened to the steepest in three weeks.

"There was expectation from some that we’ll see an extension of the asset purchase program, that’s the disappointment in the market right now," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. "Maybe there’s going to be less pressure to negative rates in Europe, and the impact there is being felt in the U.S. as well."

The ECB’s decision to stand pat is a reminder to traders that there are limits to the global easing that helped push developed-market sovereign yields to record lows this year. Treasuries have returned more than 5 percent in 2016 as negative rates in Europe and Japan boosted the comparative appeal of U.S. debt. Continued stimulus measures abroad have hampered the Federal Reserve’s efforts to raise interest rates after liftoff from near zero in December.

Treasury 30-year bond yields rose seven basis points, or 0.07 percentage point, to 2.30 percent at 5 p.m. New York time, the highest in a month on a closing basis, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in August 2046 was 98 27/32.

Yield Curve

Benchmark U.S. 10-year yields rose six basis points to 1.60 percent.

The gap between yields on five- and 30-year debt climbed to about 113 basis points, the highest on a closing basis since Aug. 18.

Futures pricing indicated about a 30 percent chance of tighter policy this month, according to data compiled by Bloomberg. The probability of a move by year-end was 58 percent. The calculations assume the effective fed funds rate will average 0.625 percent after the central bank’s next boost.

Fed officials next meet Sept. 20-21. After entering 2016 expecting to hike four times, policy makers have left borrowing costs unchanged and pared projections for the path of rates.