Bonds Worldwide Pull Out of Tailspin This Week on Growth Concern

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Government bonds worldwide advanced this week as a surging dollar sparked warnings from Federal Reserve officials that the stronger currency may hamper the U.S. economic recovery.

The Bloomberg Global Developed Sovereign Bond Index (BGSV) 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 interest rates next year.

“Bonds rallied again as the market is nervous about the global economic outlook which means the Federal Reserve may have to delay its rate increase,” said Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “Recent messages from Fed policy makers are mixed. The strong dollar may damp U.S. growth and attract more money into U.S. Treasuries, putting further downward pressure on their yields.”

Treasury 10-year yields were little changed at 2.50 percent as of 10:52 a.m. London time, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due in August 2024 was 98 29/32.

The rate rose to 2.65 percent on Sept. 19, the highest since July 7. It has dropped seven basis points, or 0.07 percentage point, this week.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, climbed to 1064.81 today, the highest level since June 2010.

Slow Exports

Japan’s 10-year yield was little changed at 0.515 percent today, while Australia’s (GACGB10) fell nine basis points to 3.49 percent. On a weekly basis, they have dropped five basis points and 24 basis points. The rate on U.K. 10-year gilts declined 11 basis points from Sept. 19, to 2.44 percent.

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 consumer confidence index dropped to 8.3 for October from 8.6, the lowest since February, according to a survey published today by Nuremberg-based GfK. 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.

German 10-year yields have fallen nine basis points this week to 0.96 percent.

Fed Forecast

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.

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