Strengthening Economic Data Prompts Global Bond Selloff

Government bond prices around the world declined today as expectations for an increase in global central bank stimulus lessened.  Beginning in the U.K., the yield on the 10-year gilt reached its highest level since the Brexit referendum after GDP growth in the third quarter tallied 0.5% compared to median forecasts of 0.3%.  The better-than-expected data supported sentiment from BOE Governor Mark Carney, who earlier this week signaled his belief that additional 2016 rate cuts to boost the post-Brexit economy were unnecessary.  Bonds prices in the Eurozone similarly fell, with German 10-year bund yields rising for the fifth-straight day to 0.14%.  In Asia, Bank of Japan Governor Haruhiko Kuroda advised yesterday that the entire 80 trillion yen worth of bond purchases per year outlined in the BOJ monetary plan may not be required to keep the 10-year yield near its 0% target.  The news held the yen/$ rate below the 105 technical resistance level with central bank meetings for both countries scheduled next week.  With the strong possibility (~75%) of a December rate hike, US Treasury prices correspondingly shifted in-line with the global fixed income selloff.  The yield on the 10-year Treasury note touched a five-month high of 1.861% before settling down close to 1.845%.

Economic data in the US was highlighted by weaker-than-expected capital goods orders, continued strength from weekly labor market figures, and encouraging levels of pending home sales.  New orders for manufactured capital goods fell 1.2% in September after previously rising at the same rate in August.  Reduced demand for computers and other electronics accounted for a significant portion of the decline, pointing to a potential slowdown in business activity in the fourth quarter.  Initial jobless claims provided a more upbeat tone, reporting a 3,000 decrease in weekly unemployment filings to 258,000.  The figure marks the 86th straight week of sub-300,000 claim readings.  Building off the positive housing data from earlier in the week, pending home sales recorded a 1.5% rise in September (2.4% YoY).  The index stands at the highest level since April and exceeded expectations of 1% growth.

All three major U.S. stock indexes finished down 0.15%-0.65%, while the selloff in bonds has increased Treasury yields/swap rates 1-7 bps across the curve in a bear steepening pattern.  Prices of crude oil rebounded roughly 1% following rumors of the Gulf nations’ willingness to cut peak output by four percent.  WTI crude remains below $50 at $49.65/barrel while Brent crude reached $50.40/barrel.