Haven Bonds Reflect Global Pain

Risk aversion is back. Italy is the focal point, with its bond market in meltdown, its politics in crisis after President Sergio Mattarella blocked the formation of an antiestablishment government and its credit rating under threat.
 That is all now making bigger waves: Europe's deepening troubles and disappointing global growth signals are sparking a sudden rally in haven bonds such as U.S. Treasurys.
 The moves are notable because haven bond yields until now have shown little reaction to the creeping tide of unsettling news that has emerged in 2018. The overwhelming focus has been on how far and fast yields might rise, particularly in the U.S.
 Instead they have been falling rapidly. The 10-year German bund yield Tuesday morning briefly dipped below 0.20% before backing up to 0.28%. It has more than halved in the past two weeks, and last week alone racked up its biggest fall since mid-2012, when the eurozone sovereign-debt crisis was still raging, according to FactSet. Ten-year U.S. Treasury yields have fallen well below 3% again.
 In the eurozone, the move in German yields makes the selloff in Italian debt look even more extreme. The gap between 10-year German and Italian bond yields—a key indicator of market stress—has now risen above 2.75 percentage points, its widest since 2013.
 In the U.S., the move may put renewed focus on the flattening of the Treasury yield curve, another potential sign of economic distress, since short-dated yields should be supported by expectations of further Federal Reserve rate increases.
 Worries that Italy could cause the eurozone to fragment also are pushing up the dollar, adding further momentum to a move that has already caused turmoil in emerging markets. The euro has fallen to its lowest since July, below $1.16.
 Along with the currency, bond-market returns have flipped, likely wrong-footing investors. German bonds are now up 1.3% on the year, while Italian bonds are down 3%. Treasurys gained 0.8% last week, their best performance so far this year.
 Italian bonds and stocks are just the latest in a string of risk-seeking trades that have run into trouble in 2018. It may be some small relief that haven bonds are now providing an offset.
 However, it is also a sign that the benign conditions that prevailed for investors until recently are under heavy fire. The market ride is set to get bumpier.  
—Richard Barley

 

Crossover


Total return on goverment bonds in 2018 (left)
Weekly change in 10-year German govermant-bond yield (right)

Source: FactSet

 

OVERHEARD
They moved fast for their age, but not fast enough to evade police. Two brothers allegedly broke into the window of a jewelry store in a harbor-front shopping mall in Hong Kong, snapped up $688,000 worth of jewels and took off in just 27 seconds, the South China Morning Post reported.
 There have been a series of smash-and-grab robberies at Hong Kong's many jewelry stores recently. But probably by younger men. Police say the two men are brothers aged 60 and 55.
 Three old friends attempt a bank robbery in the original version and the remake of the movie “Going in Style,” but they had led law-abiding lives. In Hong Kong, the older brother, Ho Tung-shing, was sentenced to 17 life terms in 1993 for a robbery spree, the SCMP reported, but was released after 25 years when sentencing laws changed. A life sentence would probably be shorter now.

By Melanie Abrams

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