December has been a bruising month for bond traders and we’re only four days in.
The value of the U.S. fixed-income market slid by $162.5 billion on Thursday while the euro area’s shrank by 98.3 billion euro ($107.4 billion) as a smaller-than-expected stimulus boost by the European Central Bank and hawkish comments from Janet Yellen pushed up yields around the world. A global index of bonds compiled Bank of America Merrill Lynch slumped the most since June 2013.
The ECB led by President Mario Draghi boosted its bond- buying program by at least 360 billion euros and cut the deposit rate by 10 basis points at a policy meeting Thursday but the package fell short of the amount of easing many economists had predicted.
Fed Chair Yellen told Congress that U.S. household spending had been “particularly solid in 2015,” and car sales were strong, supporting speculation the central bank will increase interest rates this month for the first time in almost a decade.
"A lot of people lost money,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 22 primary dealers obligated to bid at U.S. debt sales. “People were caught in those trades. In the old days, this would have been a one-week trade. In the new world, and in the less liquid market we live in today, it takes one day for the repricing.”
The benchmark U.S. 10-year note yield jumped 13 basis points on Thursday, the most since Feb. 6. It fell three basis points on Friday to 2.29 percent as of 2:11 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 was 99 21/32.
Germany’s 10-year bund yield surged 20 basis points on Thursday to 0.67 percent. The two-year yield climbed 13 basis points to minus 0.31 percent after dropping to minus 0.454 percent before the ECB decision, the lowest level since Bloomberg began compiling data in 1990.
The bond rout on Thursday added weight to warnings from Franklin Templeton’s Michael Hasenstab that there is a “a lot of pain” to come as rising U.S. interest rates disrupts complacency in the debt market.
“A lot of investors have gotten very complacent and comfortable with the idea that there’s global deflation and you can go long rates forever,” Hasenstab, whose Templeton Global Bond Fund sits atop Morningstar Inc.’s 10-year performance ranking, said this week. “When that reverses, there will be a lot of pain in many of the bond markets.”
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