The auctions come after Germany failed to attract enough bids for the amount offered at a 30-year bond sale on Wednesday, even as markets see only a one in four chance of a Federal Reserve rate hike.
Illustrating that policy divergence, the gap between short-dated U.S. and European yields is at its widest in over eight years. The two-year maturity fits neatly into the “medium term” time frame that central banks typically target when setting policy parameters. The dollar also weakened against a host of emerging-markets currencies including the Mexican peso, which rose to its highest level against the dollar since Aug. 19 after the decision. However the knowledge have been seen as sufficiently upbeat to steer some buyers to guess that the data-dependent Fed may increase rates of interest later this week for the primary time since 2006.
In the past six weeks, Spanish yields have risen by almost 30 basis points as investors sold bonds, wary of political instability if secessionists win an election in Catalonia at the end of the month.
Investors also shrugged off data on Thursday that showed Japan’s exports slowed for a second straight month in August, heightening fears that China’s slowdown was increasing dragging on the global economy and reinforcing expectations that policymakers eventually would be forced into more stimulus.
The slight Treasury yield decline Thursday morning reflected “squaring of positions ahead of the Fed’s decision, after the significant selloff in the Treasury market over the past couple of days”, said Jim Caron, a fixed income portfolio manager with Morgan Stanley Investment Management.
Whatever the Fed’s determination, “the markets are successfully tightening earlier than the Fed“, Tipp stated, pointing to rising Treasury yields, widening credit score spreads and – all indications that buyers are bracing for the start of a mountaineering cycle. Then buyers would step into long-term bonds because “expectations for global growth and inflation will likely fall with a rate hike“, boosting the appeal of haven debt, he said.
Futures show there’s a 32 percent chance of the Fed raising rates Thursday, according to data compiled by Bloomberg. The index jumped that month from 4.3% in July, as the energy sector saw a sharp increase in downgrades and defaults. A total 61% of investors polled say they were neutral on bond prices for the week ending Monday, compared with 63% a week ago.
Treasury bonds “are a good hedge” against downside risk on corporate bonds, he said. The answer, of course, will emerge in tomorrow’s headline-grabbing event: the Fed’s policy circus, which begins at 2:00 pm EST.