The Daily Prophet: Bond Traders Decide Greed Is Better Than Fear

Too cheap to ignore. That was the mantra in the bond market on Thursday as traders tripped over themselves to get an opportunity to buy the $29 billion of seven-year notes being sold by the U.S. government. Yes, there are plenty of concerns that inflation is picking up and the Federal Reserve may need to accelerate the pace of interest-rate increases. But this offering had something extra going for it.

So-called real yields, or what investors take home after accounting for inflation, have risen to their highest levels since 2011, or 1.35 percent for the seven-year Treasury note. The median over that time is 0.56 percent. Traders put in bids for 2.56 times the amount offered, up from 2.35 at last month's auction of seven-year notes. Strategists described the results as "strong," which is surprising given how many pundits are on record saying the long bull market in bonds that started in the early 1980s is over. Evidence that investors still find value in bonds is good for all financial markets, from stocks to the dollar. It also helps that central banks worldwide have taken a more dovish turn in recent days, conceding that the global economy has slowed a bit early in 2018.

The Bank of Japan is expected on Friday to endorse continued easing, the European Central Bank said Thursday that it avoided any discussion of its next steps toward ending bond purchases and Sweden’s Riksbank pushed back a plan to raise interest rates for the first time in seven years, according to Bloomberg News's Alessandro Speciale and Brian Swint. Earlier this week, the head of the Bank of Canada said more work was needed to heal the scars of the crisis. The top-ranked rates strategists at BMO Capital Markets wrote in a research note that following meetings with various clients, they "found many buying into the idea that should yields start to fall once again, many investors would join the move rather than bet on a continued selloff" in bonds.

EUROPE'S COMEBACK
Stocks in Europe are showing a surprising amount of strength in contrast with much of the rest of the world's major equity markets. The benchmark STOXX Europe 600 rose on Thursday to close at its highest level since Feb. 2. Meanwhile, the MSCI All-Country World Index is only at its highest since Monday. The latest move higher in European equities came even though ECB President Mario Draghi said the central bank's Governing Council spent the last two days assessing a raft of weaker economic data, acknowledging that momentum softened at the start of the year. That didn't matter to investors, who instead focused on the fact that the ECB is not quite ready to tighten monetary policy like the U.S. Federal Reserve. “The interesting thing is that we didn’t discuss monetary policy per se,” he said. “It’s quite clear that since our last meeting, broadly all countries experienced, in a different extent of course, some moderation in growth or some loss of momentum.” Draghi's remarks also gave a boost to the region's bond market, with yields on 10-year German bunds dropping by the most in more than a month. Some investors and strategist say the dovish leanings also contributed to the gains in U.S. stocks and bonds.