Bond sell-off keeps investors on edge

[September 14, 2016]  By Vikram Subhedar

LONDON (Reuters) - Rising bond yields, triggered in part by deepening worries over the difficulty of the world's major central banks to stimulate growth, kept investors in broadly risk-off mode on Wednesday.

The possible spillover effects of the rises into stock and commodity markets has hit financial assets as funds, who have been betting on a long period of low volatility and suppressed yields, are being forced to reassess positions.

European shares edged higher and were on track to snap a four-day losing streak helped by a recovery in mining shares. Trading volumes were light and banks remained a drag. The STOXX 600 is down more than 3 percent over the past week.

Stock futures on Wall Street were up 0.1 percent following Tuesday's swoon.

Euro zone bond yields rose across the board after European Central Bank Executive Board member Sabine Lautenschlaeger said the central bank should hold off on new monetary easing measures.

Most yields touched their highest levels since Britain's vote to leave the European Union in late June, extending a rise that started after the ECB's policy meeting last week, when it disappointed investors by introducing no new easing measures.

German 10-year bond yields -- the bloc's benchmark -- rose as much as 5 basis points in early trades to 0.09 percent, the highest since the result of Britain's EU vote was announced on June 24, before easing back to 0.05 percent.

The rise was even more pronounced in longer dated bonds, with 30-year yields climbing as much as 6 bps to hit 0.69 percent before a sale 1 billion euros of 30-year debt at auction on Wednesday.

"Markets have continued to be spooked by the potential for central banks to scale back the level of monetary support on almost a global basis," Peter Chatwell, head of euro rates strategy at Mizuho said.

"Lautenschlaeger's comments did little to ease fear of withdrawal of central bank's support."

HIGHLY SPRUNG

Reports that the Bank of Japan (BOJ) would persist with further monetary easing sent the yen to a one-week low against the dollar. [FRX/]

The Bank of Japan will consider making negative interest rates the centerpiece of future monetary easing, sources told Reuters. The move would underscore concerns over limits to economic stimulus efforts.

Dealers work on a trading floor at BGC Partners in the Canary Wharf business district in London, Britain September 12, 2016. REUTERS/Toby Melville

Financial markets are addicted to central banks' backstop, Citi's Matt King warned in a note to clients, adding that interventions have also caused a disconnect of asset prices from fundamentals while rising correlations erode the benefits of diversified portfolios.

"Beneath a veneer of a stability, the system is becoming ever more highly sprung," said King.

The dollar eased slightly against a basket of currencies, falling 0.2 percent, having hit a one-week high the previous day, just a week before the U.S. Federal Reserve's next policy meeting begins. Markets are pricing in just a 15 percent chance that interest rates will be hiked this month, according to CME FedWatch.

Oil prices recovered after falling as much as 3 percent in the previous session.

Brent crude futures were trading at $47.41 per barrel at 0758 GMT, up 0.6 percent, from the last settlement. U.S. West Texas Intermediate futures were up 38 cents, or 0.9 percent, at $45.28 a barrel.

(Reporting by Vikram Subhedar; Additional reporting by John Geddie; Editing by Jeremy Gaunt and Andrew Heavens)

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