March 19, 2020 / 7:18 AM / 18 days ago

Powerful central bank action stems bond drubbing but volatility prevails

TOKYO/LONDON (Reuters) - Major central bank action helped staunch heavy losses on global bond markets on Thursday, with euro zone and U.S. borrowing costs easing modestly, even though the rising risk of recession and hefty fiscal stimulus means the rally is a fragile one.

FILE PHOTO: Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

In another day of incredibly volatile trade, Australian bond yields jumped to their highest in almost a year while Swiss 10-year yields rose to their highest since May last year.

But in the euro zone’s southern bond markets, borrowing costs were down sharply after the European Central Bank’s emergency action that increases its 2020 stimulus plan to a trillion euros.

And British gilt yields, which had risen sharply earlier in the day, tumbled after the Bank of England cut interest rates to 0.1% and ramped up its bond-buying program.

“The (BoE) move does help but whether this or other central bank action will help draw a line under risky assets, I’m not convinced,” said Adam Cole, chief currency strategist at RBC Capital Markets.

Two-year British gilt yields were last down 13 basis points on the day at around 0.21%, reversing earlier rises.

In Italy, at the centre of both the coronavirus outbreak in Europe and the selling in bond markets, 10-year borrowing costs slid over 70 basis points to 1.52%. They were last down 45 bps on the day, set for the biggest one-day fall since 2011.

“The bond market reaction to the ECB’s announcement has been very encouraging against the backdrop of huge uncertainty,” said Pictet Wealth Management strategist Frederik Ducrozet.

“It’s not the end of the story, there will be hiccups as the ball is now firmly in the fiscal court. But, the safety net is now in place.”

WILD SWINGS

But trade remained volatile in a week where desperate investors have dumped government bonds and hoarded cash in markets gripped by pandemic fears.

German 10-year bond yields were 5 bps higher at -0.18% on fresh signs that Germany was about to ramp up spending in the face of coronavirus.

With economies around the world disrupted by widespreadtravel restrictions and economic activity near a standstill,foreshadowing a deep recession at least on a par with the 2008global financial crisis, bonds have not been spared.

The recent sell-off in equities and currency marketshas prompted investors to abandon government bonds, normallyconsidered a safe asset, to make up for losses elsewhere and tostock up on cash, particularly dollars.

“Everybody is hoarding dollars, much like people arestocking up toilet rolls around the world now,” said MasayukiMurata, general manager of balanced portfolio investment atSumitomo Life Insurance in Tokyo.

“You never know whether you really need that many toiletrolls. Some people may have piles of them. But they won’t letthem go now... The routs are driven not so much by heavy sellingas lack of bidders.”

Brokerages, with their trading books damaged, arerestricting trading. As orders in markets have fallen to atrickle, market fluctuations have widened to unprecedentedlevels for many traders.

Australia’s 10-year bond yield jumped more than 50 basispoints to 1.647%, reaching its highest level sincelast May, even after the Reserve Bank of Australia cut interestrates for a second time this month and launched quantitativeeasing in an emergency move.

“It’s quite a dislocated market. We are one of the marketmakers. The reason we are pricing defensively is because youdon’t want to be caught with a lot of inventory on the book,” said Su-Lin Ong, managing director at RBC Capital Markets in Sydney.

Analysts said the large moves in long-dated bond yields globally have been “largely disconnected” from fundamentals or central bank decisions, with technical factors playing a much bigger role in amplifying these moves.

Even in the U.S. bond market, the most liquid in the world,trading has become highly erratic.

The U.S. 10-year Treasury yield, while lower on Thursday, is almost 1 percentage point above its record low of 0.318% touched last week, despite the U.S. Federal Reserve’s one percentage point rate cut on Sunday.

The market hardly budged after the U.S. Fed rolled out yetanother emergency credit programme, announcing it would make loans to banks that offer as collateral assets purchased from money market mutual funds (MMFs).

The Bank of Japan meanwhile conducted two unscheduled government bond purchases totalling 1.3 trillion yen ($11.95 billion) to help quell the market.

Still, that did not stop the market’s price slide. The 10-year JGB yield climbed 4 basis pointsto 0.090%, a high last seen in late 2018, while the five-yearyield gained 2.5 basis points to minus 0.050%.

Reporting by Swati Pandey in Syndey Hideyuki Sano in Tokyo, and Dhara Ranasinghe in London; additional reporting by Tom Westbrook in Singapore; Editing by Hugh Lawson

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