By Gertrude Chavez-Dreyfuss and Yoruk Bahceli
NEW YORK/LONDON (Reuters) - Major sovereign bonds rallied across the globe on Monday and the U.S. 10-year yield backed off from its recent high after a surge that shook up global markets last week.
Benchmark U.S. Treasury yields eased for a second consecutive session on Monday after climbing to a one-year high last week as Federal Reserve officials continued to downplay runaway inflation concerns, though a round of solid economic data curbed the decline.
Other central banks, meanwhile, suggested they are unlikely to tolerate a rise in yields.
TD Securities in a research note said it sees a year-end forecast of 1.45% for U.S. 10-year yields.
"We believe that any further rise in rates will significantly tighten financial conditions and could therefore be self-limiting," TD wrote.
Federal Reserve Bank of Richmond President Thomas Barkin said on Monday there is no indication that inflation expectations are moving beyond a reasonable range. Meanwhile, the Reserve Bank of Australia on Monday made larger-than-expected asset purchases while European Central Bank policymaker François Villeroy de Galhau said the recent rise in bond yields was unwarranted and the ECB needs to push back using the flexibility embedded in its bond purchase program.
In Australia, 10-year bond yields tumbled as much as 22 basis points after the Reserve Bank of Australia announced a larger-than-usual 4 billion Australian dollars ($3.1 billion)worth of bond purchases, its second such move in as many days.. But Aussie bond yields were last slightly up at 1.671%. "This development may well be having a positive demonstration effect in terms of bolstering confidence that central banks are likely to push back against yield moves which they worry may be unwarranted," Rabobank analysts led by Richard McGuire told clients. Many markets had already shown signs of calming on Friday and sentiment held up on Monday, with sovereign bond yields in Asia, the United States, and the euro area all starting the week lower. The outperformance of Australian bonds, in terms of prices, which were poised for their best daily performance since the COVID-19 market rout last March, underscored market analysts' impression that verbal intervention by central banks would not be enough to drive yields much lower after sharp rises.
Monday's moves were also explained by a rally in eurodollar futures, which investors use to bet on future interest rate moves, Rabobank analysts said. They showed an unwinding of some of the moves last week that priced in a Federal Reserve rate hike in early 2023. <0#ED>
Eurodollar futures on Monday have fully priced in a U.S. rate hike by June 2023, from March 2023 last Friday.
In the United States, Treasuries underperformed and by midday the benchmark 10-year yield was down at 1.447%.
U.S. five-year bond prices posted the biggest gains, with yields down 5 basis points at 1.123%.
"Treasury prices are rising due to heavy futures-related buying, short-covering and decent buying in mortgages, which is spurring lower yields in five-year and seven-year paper," said Tom di Galoma, managing director at Seaport Global in New York.
Sebastien Galy, senior macro strategist at Nordea Asset Management, noted that this was likely the end of this "taper tantrum," presenting opportunities "for investors faced with dislocated markets."
In the euro area, where analysts say the move higher in bond yields has been less justified than in the United States, Italian 10-year yields fell to 0.664% and German 10-year yields were down by as much as 7 basis points, both set for their biggest daily falls since June 2020..
Weekly data showed the European Central Bank, which verbally intervened last week to stress it was watching the rise in bond yields, slowed its net bond purchases during the previous week. However, a spokesman said the drop was explained by much higher redemptions.
Graphic: Global bond yields start the month falling - https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwzoezvw/global%20bond%20yields.png
($1 = 1.2850 Australian dollars)