(Bloomberg) -- Global bonds are set for their worst month in six years, sparked by investor concern that central banks are preparing to gradually reduce stimulus.
They lost about 3 percent this month through Oct. 28, according to the Bloomberg Barclays Global Aggregate Index, which has a market value of almost $47 trillion. Treasuries, which have been swept up in the selloff, were on pace for their biggest tumble in 20 months, losing 1.2 percent, a separate index shows.
U.S. government debt has slumped in recent weeks as data give investors reason for optimism about the world's largest economy. Consumer purchases climbed in September by the most in three months as incomes grew, signaling momentum in the biggest part of the economy. That's stoking speculation the Federal Reserve will raise interest rates by year-end.
“People are really responding to this idea that central banks will be suddenly shifting away from their excess accommodation,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “The U.S. is further along in that aspect of monetary policy. It's likely the Fed moves before year-end.”
The benchmark Treasury 10-year note yield fell two basis points, or 0.02 percentage point, to about 1.83 percent as of 5 p.m. in New York, based on Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 97 3/32. The yield reached 1.88 percent on Oct. 28, the highest since May.
The yield increased about 0.23 percentage point in October, the most since June 2015.
At no point in October did 10-year Treasuries gain for more than two consecutive days.
“I see yields going up,” said Soniya Chen, a government-bond analyst at Hontai Life Insurance Co. in Taipei, with $6.34 billion in assets. “The U.S. economy is performing better than the rest of the world.” Ten-year yields may approach 2 percent over the next six months, according to Chen, who said she's stockpiling cash.
The selloff in Treasuries may have its limits because investors don't see quicker inflation on the horizon. An inflation gauge the Fed monitors climbed 1.2 percent in September from a year earlier, the most since November 2014, although still below the central bank's target of 2 percent.
For Bob Doll at Nuveen Asset Management, 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 Oct. 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.”
Sullivan said he had less interest-rate risk -- a measure called duration -- than his benchmarks heading into the October selloff. He has added duration as yields climbed. The 10-year Treasury yield “is probably capped at some level,” about 50 basis points higher than now, he said.
Commercial Banks
In a sign not every one is bullish on the U.S. economy, commercial banks in the U.S. have amassed $90 billion of Treasuries and non-mortgage debt from federal agencies this year, bringing the total to $754 billion, according to data compiled by the Fed. The five biggest lenders -- Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and U.S. Bancorp -- held a combined $206 billion of government debt at the end of the second quarter. That's a 74 percent 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 U.S. was still reeling from the housing bust. Americans are also saving more rather than taking on extra debt, damping demand for new loans.
For a QuickTake report on central bank interest rates, click here.
U.S. employers added 175,000 workers in October, the most since July, according to a survey of economists before the monthly payroll report on Nov. 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 72 percent, futures show.
--With assistance from Lukanyo Mnyanda To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net, Brian Chappatta in New York at bchappatta1@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum, Paul Cox
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