US Treasuries had their biggest one-day sell-off since January on Tuesday after European Central Bank president Mario Draghi declared “deflationary forces” had been vanquished, causing ructions across global bond markets.
The yield on the US 10-year Treasury, which moves inversely to price, rose 7 basis points to 2.21 per cent, the highest level for the benchmark bond since the Federal Reserve raised interest rates earlier this month.
The Canadian 10-year bond climbed 11 basis points to 1.57 per cent.
The US dollar also suffered, falling 1 per cent to 96.50 against a basket of its peers, while the euro rose to a 2017 high against the greenback.
Mr Draghi triggered the sell-off in global bonds after markets took his comment to mean the ECB could start tapering its bond-buying programme sooner than expected.
He said that “deflationary forces have been replaced by reflationary ones” as the euro area strengthens, and added that “the central bank can accompany the recovery by adjusting the parameters of its policy instruments — not in order to tighten the policy stance, but to keep it broadly unchanged”.
“I reiterate the danger that is the European bond market,” said Peter Boockvar, chief market analyst at the Lindsey Group. “As the ECB gets deeper into its taper, it can single-handedly drag US yields higher — as they are today.”
Mr Draghi’s remarks came nearly five years after he said the ECB would do “whatever it takes” to preserve the euro. The central bank is currently still buying up assets to support bond prices under its quantitative easing programme.
The sell-off started in Europe on Tuesday, with the yield on the German 10-year Bund climbing 12.5 basis points to 0.37 per cent, while that of the French 10-year yield rose 13.6 basis points to 0.73 per cent. The difference between the Bunds and corresponding 10-year Treasuries fell to the lowest level since November 2016.
“The cheaper Bunds trade, the less compelling that cross-border trade is for European accounts, which is why you get these significant reactions. Even when it is market specific news to Europe, it affects pricing in the US,” said Michael Cloherty, a strategist at RBC Capital Markets.