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Global bonds head for worst month in six years

Singapore - Global bonds are set for their worst month since 2010, sparked by investor concern that central banks are preparing to gradually reduce stimulus.

They’ve lost about 3% in October, according to the Bloomberg Barclays Global Aggregate Index, which has a market value of $46.7trn. Treasuries, which have been swept up in the selloff, are set for their biggest tumble in 20 months, losing 1.2%.

US government debt has been slumping in recent weeks as data give investors reason to be optimistic on the outlook for the world’s largest economy. Consumer purchases climbed in September by the most in three months as incomes grew, signalling momentum in the biggest part of the economy.

That’s stoking speculation the Federal Reserve will raise interest rates by year-end.

"I see yields going up," said Soniya Chen, a government bond analyst at Hontai Life Insurance Company in Taipei, with $6.34bn in assets.

"The US economy is performing better than the rest of the world. The Fed will raise rates in December."

Ten-year yields may approach 2% over the next six months, according to Chen, who said she’s stockpiling cash.

The benchmark Treasury 10-year note yield fell two basis points, or 0.02 percentage point, to 1.83% as of 8:55 in New York, based on Bloomberg Bond Trader data. The price of the 1.5% security due in August 2026 was about 97.

The yield reached 1.88% on October 28, the highest since May.

At no point in October did 10-year Treasuries gain for more than two consecutive days. The yield has increased 0.24 percentage point this month.

The selloff in Treasuries may pause because the Federal Bureau of Investigation’s decision to review a new batch of files that may be related to Hillary Clinton’s e-mail practices may spur demand for safety, said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. The investigation is offsetting signs of economic improvement, Shimazu said.

Investors also don’t see quicker inflation on the horizon. An inflation gauge the Fed monitors climbed 1.2% from a year earlier, still below the central bank’s target of 2%.

For Bob Doll at Nuveen Asset Management, the bright side is that bonds’ monthly loss partly reflects a strengthening economy.

"I like the fact that interest rates are moving up a little bit," Doll, who has 36 years of experience managing money, said on Bloomberg Television October 28. "It means the overall environment is healing.

It means the deflation risk is going down. We’re in a long-term bottoming process for rates."

Commercial banks

In a sign not everyone is bullish on the US economy, commercial banks in the US have amassed $90bn of Treasuries and non-mortgage debt from federal agencies this year alone, bringing the total to $754bn, according to data compiled by the Fed.

The five biggest lenders - Wells Fargo & Company, JPMorgan Chase & Company, Bank of America Corporation, Citigroup and US Bancorp - held a combined $206bn of government debt at the end of the second quarter, according to the latest available filings. That’s a 74% increase over the past three years.

In the past year, more loan officers at large and midsize banks have tightened credit to businesses than at any time since 2009, when the US was still reeling from the housing bust. Americans are also saving more rather than taking on extra debt, damping demand for new loans.

US employers added 175 000 workers in October, the most since July, according to a survey of economists before the monthly payroll report on November 4.

Traders see the Fed keeping rates unchanged when it meets this week and raising them at the final policy meeting of the year in December, according to data compiled by Bloomberg based on futures.

The probability of a December move is about 70%, futures show.

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