Treasuries Fall With Bunds as ECB Said to Build Taper Consensus

  • Benchmark U.S. 10-year notes decline for a third day
  • Long-dated securities lead losses as yield curve steepens

Treasuries fell, following euro-area debt lower, after a Bloomberg report said the European Central Bank will gradually wind down bond purchases before the conclusion of its 1.7 trillion-euro ($1.9 trillion) quantitative-easing program.

Long-dated U.S. securities led losses as German 10-year bund yields rose by the most in almost a month. While policy makers don’t exclude that the program may still be extended at the full pace of 80 billion euros a month, an informal consensus has built among them in the past month that asset-buying will have to be tapered, according to central bank officials who asked not to be identified because their deliberations are confidential.

Investors are starting to doubt the resolve of central banks from Europe to Japan to maintain accommodative policies that helped push global bond yields to record lows this year. Sovereign debt similarly tumbled after ECB President Mario Draghi on Sept. 8 left interest rates unchanged and played down the need to pledge additional stimulus. The lack of commitment from Japan and Europe to extend or increase their asset-purchase targets threatens bond bulls who also face the possibility of higher interest rates in the U.S. this year.

“The idea that they are thinking about the end of QE is a shock for the market," said Aaron Kohli, a fixed-income strategist at BMO Capital Markets Corp. in New York, one of 23 primary dealers that trade with the Fed. "That was seen as a bearish sign by the market. That is one of the reasons that the curve is selling off pretty sharply.”

Benchmark U.S. 10-year yields rose six basis points, or 0.06 percentage point, to 1.69 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, the highest closing level since Sept. 20. The price of the 1.5 percent security due in August 2026 was 98 10/32. 

The gap between yields on two- and 30-year notes, a gauge of the yield curve, steepened to about 1.59 percentage point.

“The word ‘taper’ with regards to QE reinforces the concerns we had related to the disappointment from the ECB meeting on Sept. 8 that caused a similar move like this, where the long-end retreats faster than the intermediates,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.

Germany’s 10-year bund yield jumped four basis points, or 0.04 percentage point, to minus 0.054 percent as of the 5 p.m. close in London.

“The Governing Council has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament,” the ECB said in an e-mailed statement.

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