The Daily Prophet: It's Starting to Get Real in the Bond Market

Connecting the dots in global markets.

If you liked bonds yesterday, you must love them today. The U.S. Treasury market fell for an eighth day, the longest slump since 2012. The trigger this time was data showing U.S. private-sector job growth for February exceeded the most optimistic expectations two days before the Labor Department’s monthly employment report.

It's barely one week into March but this is already the worst month for the global bond market since November. The Bloomberg Barclays Global Aggregate index is down 1.13 percent through yesterday, after gaining in January and February. Yields on benchmark 10-year notes are closing in on 2.60 percent. That's a key level that the bond king Bill Gross at Janus Capital Management has said would signal the start of a bear market, should it hold on a weekly basis. Some others point to 3 percent.

It's not all doom and gloom. One measure of sentiment showed investors are net positive on Treasuries for the first time since before the U.S. election. And, today's auction of $20 billion in 10-year notes drew the most demand since June. But, with the Labor Department's monthly jobs report looming Friday and the Federal Reserve talking tough on interest rates ahead of its meeting next week, few strategists say now is the time to buy. "We’re not duration fans yet till momentum turns or the Fed’s more hawkish rhetoric starts to dent risk markets a bit more than it has so far,'' the rates analysts at BMO Capital Markets Group said in a note today.

What happened to the big rally in stocks? The MSCI All Country World Index of equities fell for a fifth day, its longest losing streak since August, in what may be a sign that investors are losing patience with a "Trump Trade" built on hoped for-tax cuts, bank regulatory reform and fiscal stimulus. Although the decline is a manageable 1 percent, all 11 industry groups in the benchmark have dropped, led by a 2.58 percent decline for energy companies, which were supposed to be some of the biggest beneficiaries of the Trump administration's policies. In the U.S. market, bond proxies such as utilities and real estate companies declined at least 1.1 percent as Treasury yields jumped.

Is it time to start worrying about the oil market, too? West Texas Intermediate for April delivery dropped $2.86, or 5.4 percent, to settle at $50.28 a barrel on the New York Mercantile Exchange, the lowest level this year, after government data showed U.S. crude inventories climbed to a record last week as output and imports rose. The declines come even though Saudi Arabia and Russia, the architects of an OPEC deal late last year to start cutting production, presented a united front on complying with the reductions at the CERAWeek conference Tuesday in Houston. Alongside officials from Iraq and Mexico, they insisted the curbs are working. "OPEC didn’t do a good job at CERA convincing the market that it would roll over the cuts into the second half of the year," Bob Yawger, director of the futures division at Mizuho Securities USA Inc., told Bloomberg News's Mark Schenk.

The greenback is enjoying a rebound on rising prospects for a Fed rate increase next week and two more before the year is out. The Bloomberg Dollar Spot Index has risen in eight of the past nine trading days. The American currency has the potential to strengthen from around 5 percent to as much as 20 percent this year on Trump's promised tax cuts, Loomis Sayles's senior sovereign analyst Laura Salo wrote in a blog on the firm's web site. Others were more skeptical. “There’s little scope for the U.S. dollar to rally,” Bipan Rai, senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce, told Bloomberg News's Lananh Nguyen. “Without more clarity around Trump’s fiscal plans, it looks as though there’s little reason for the Fed to change from three hikes.”

The bottom is falling out from under sterling -- again. A Bloomberg index that tracks the U.K. pound versus a basket of leading global currencies fell to a seven-week low. It has fallen in nine of the past 11 trading sessions. Chancellor of the Exchequer Philip Hammond presented his first budget today as Britain prepares to exit the European Union, and there was plenty to depress traders. While 2017's economic growth forecast was revised higher to 2 percent from 1.4 percent, that's still below the 2.2 percent estimate from a year ago before Britain voted to quit the bloc.

The European Central Bank meets tomorrow to discuss monetary policy and, while no change is expected, investors will be listening closely to President Mario Draghi's press conference to see if he is leaning toward reining in stimulus in coming months. Although Draghi announced in December that bond purchases would be extended until at least the end of 2017, euro-area inflation has accelerated to 2 percent for the first time in four years. Economists surveyed by Bloomberg predict the central bank will reiterate that its monthly bond-buying program will run until at least December, slowing to 60 billion euros ($63 billion) in April from the current 80 billion euros.

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