Bonds worldwide pulled out of a tailspin this week as a surging dollar sparked warnings from Federal Reserve officials that the stronger currency may hamper the U.S. recovery.
The Bloomberg Global Developed Sovereign Bond Index headed for its first weekly gain this month, buoyed by speculation weak economic growth in Europe and Japan will spur policy makers there to maintain stimulative monetary policy. The gauge advanced 0.2 percent, trimming September’s decline to 2.7 percent. Yields attracted investors after climbing last week when Fed policy makers increased their estimate for how far they’ll raise borrowing costs next year.
“The speed in the rise of interest rates in response to the Federal Reserve, and also gains in the U.S. dollar, have had an impact on demand for Treasuries,” said Tony Morriss, an interest-rate strategist at Bank of America Merrill Lynch in Sydney. While the stronger dollar may damp U.S. growth, unprecedented easing in Japan and Europe have also “served to reverse some of the sharp rise in yields that we saw earlier.” The company’s Merrill Lynch unit is one of the 22 primary dealers that trade directly with the Fed.
The U.S. 10-year yield was little changed at 2.50 percent at 6:56 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due August 2024 was 98 29/32. The yield rose to 2.65 percent on Sept. 19, the highest since July 7. It has dropped eight basis points this week.
The Bloomberg Dollar Spot Index (BGSV), which tracks the U.S. currency against 10 of its major counterparts, rose to a four-year high yesterday.
Japan’s 10-year yield held at 0.52 percent, while Australia’s (GACGB10) fell nine basis points to 3.49 percent. On a weekly basis, they have dropped four basis points and 24 basis points.
The dollar rally may slow exports in coming months, Fed Bank of Atlanta President Dennis Lockhart said yesterday. New York Fed President William C. Dudley said this week if the dollar were to strengthen a lot it may hamper the central bank’s efforts to spur growth.
Germany’s Ifo institute said its measure of business climate worsened in September. Japan’s inflation slowed more than economists forecast in August, highlighting the risks facing Bank of Japan Governor Haruhiko Kuroda in his push for prices to rise 2 percent.
Fed officials last week boosted their median estimate for the benchmark interest rate for the end of 2015 to 1.375 percent, compared with 1.125 percent in June. Policy makers have kept their target for the rate, which banks charge each other on overnight loans, close to zero since 2008.
Treasury investors are only prepared for a Fed rate of about 1 percent by the end of next year, said Tomohisa Fujiki, head of interest-rate strategy in Japan at BNP Paribas SA, whose New York unit is another primary dealer. Short-term Treasuries, those most sensitive to what the Fed does with its main rate, are most vulnerable, according to Fujiki.
“Yields will go higher,” he said in an interview in Singapore. “If the Fed decides on such aggressive moves compared to what the market is currently pricing in, obviously the short-term sector could be hurt most.”
Prospects for higher rates have been supported by data showing momentum in the U.S. economy is picking up. Gross domestic product in the second quarter rose at a 4.6 percent annualized rate, higher than a previous estimate of 4.2 percent, according to the median forecast in a Bloomberg News survey of analysts. That would be the fastest pace since 2011.