Bonds Tumble Worldwide as Stocks Reach Highs on Growth Optimism

Global bond markets posted their biggest monthly losses in nine years in May as the U.S. dollar rallied and stocks reached record highs amid speculation a strengthening U.S. economy will allow the Federal Reserve to reduce its monetary stimulus.

The over $40 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market Index fell 1.5 percent on average, led by a 2 percent drop in Treasuries. The MSCI World Index lost 0.1 percent while the Standard & Poor’s 500 reached a record high. The U.S. Dollar Index soared 3.3 percent as the greenback gained versus all its major peers. The S&P GSCI Total Return Index of metals, fuels and agricultural products dropped 1.5 percent a month after falling the most since May 2012.

Employment gains and increases in housing and consumer confidence suggested the recovery in the U.S. economy, the world’s largest, is gaining momentum, prompting traders to increase bets the Fed will scale back its $85 billion in monthly debt purchases later this year. The Organization for Economic Cooperation and Development predicts faster global economic growth, led by the U.S. and Japan.

“Investors’ attempt to access what the Fed will do with its bond-buying program has been pretty central to the performance of all asset classes,” Neil Mackinnon, a global macro strategist at VTB Capital Plc in London, said May 30 in a telephone interview. “The markets are very sensitive to the idea that the Fed might ease back on their debt purchases.”

Bernanke Testimony

Yields on U.S. Treasuries, German bunds and U.K. gilts are all forecast to rise by year-end from current levels, while those in Japan may fall, according to separate surveys of analysts by Bloomberg News.

Fed Chairman Ben S. Bernanke said during a response to questions following Congressional testimony on May 22 that the central bank could consider reducing the amount of Treasuries and mortgage debt it buys within “the next few meetings” if officials see signs of sustained improvement in the labor market.

The OECD sees growth among all its member countries accelerating to 2.3 percent next year from 1.2 percent this year. China, which isn’t part of the group, will expand 8.4 percent in 2014 after growth of 7.8 percent this year, according to the OECD report.

“The tone of the economic data has certainly been getting better and that is certainly one of the reasons why yields are pushing a little bit higher along with this talk of a Fed taper of debt purchases,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, said in a May 29 interview on Bloomberg Radio.

Yields Rise

Last month’s losses in the Global Broad Market Index of bonds trimmed its year-to-date returns to 0.13 percent, including reinvested interest. While the effective yield rose to 1.83 percent, from 1.53 percent on April 30.

Bank of America Merrill Lynch’s index of sovereign bonds lost 1.63 percent, as Treasuries fell 2 percent and Japanese government bonds plunged 1.25 percent, the most since April 2008.

Corporate bonds globally from the riskiest to most-creditworthy borrowers dropped 1.35 percent, the most since November 2011. Investment-grade notes lost 1.55 percent as junk bonds declined 0.48 percent, the first monthly loss in a year.

The MSCI World Index’s loss in May trimmed this year’s gains to 8.2 percent. The biggest stock-market losses were found in South Africa (JALSH), where the main equities index soared 8.5 percent. At the opposite end, Peru’s IGBVL Index slid 7.5 percent.

Global Equities

Germany’s DAX rose the most among developed markets, gaining 5.6 percent as carmakers rallied. The Portugal PSI 20 Index dropped 5 percent for the worst performance as Banco Espirito Santo SA slumped amid an unexpected quarterly loss.

Japan’s Topix slid 2.5 percent, trimming gains for the year to 32 percent, after rising bond yields spurred losses in financial shares. The index has entered a correction by falling more than 10 percent since May 22.

The S&P 500 reached an all-time high of 1,669.16 on May 21 and rose 2.1 percent in its seventh straight monthly gain, the longest stretch since September 2009. The rally has lifted the index 14 percent this year and pushed its dividend yield down to 2.08 percent, below the 10-year Treasury note’s yield for the first time in 13 months.

“The market is a power house,” Bruce Bittles, the chief investment strategist at Milwaukee-based RW Baird & Co., which oversees about $100 billion, said in a May 30 phone interview. “My biggest concern is a lot of people are being pushed into the market that really don’t want to be here and will exit at the first sign of trouble.”

Dollar Index

In the foreign-exchange market, IntercontinentalExchange Inc.’s Dollar Index rebounded from a 1.48 percent drop in April on optimism the Fed may soon slow the pace at which it prints the currency to buy bonds. The gauge measures the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona.

The China’s yuan was the only currency to gain in May versus the greenback among the 31 most widely traded currencies tracked by Bloomberg. The Yuan appreciated 0.51 percent during the month to 6.1345 per dollar.

The biggest lowers against the U.S. currency were the South African Rand, sliding 10.61 percent, the Australian dollar, losing 6.89 percent, the Brazilian Real falling 6.53 percent and the New Zealand dollar, falling 6.51 percent.

Australia’s dollar tumbled the most since September 2011, weakening 7.71 percent to 95.71 U.S. cents. Japan’s currency depreciated 2.99 percent, bring this year’s losses to 13.64 percent as the Bank of Japan doubled its bond buying program and inflation target to end a protracted period of deflation.

Chinese Slowdown

“Some of the Chinese data hasn’t been a resilient as some had thought,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, during a telephone interview on May 30. “Concerns about the China story have been rising, especially as commodity prices are moving lower on the back of that, and that hampered the Australian dollar.”

China’s slowdown is reverberating in Australia on the prospects for reduced trade between the nations. Manufacturing in China, the nation’s biggest trade partner, contracted in May for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.

The S&P GSCI gauge of 24 commodities declined in May after falling 4.7 percent in April. It’s down 5.6 percent this year as slowing growth in China crimped demand for raw materials.

“Commodities are underperforming because of concern about growth, especially in China,” Russell Silberston, a London-based money manager at Investec Asset Management, said in a phone interview on May 28. The company manages $105 billion.

Gold Slumps

Cocoa fell 7.5 percent, the most this year, as stockpiles in warehouses monitored by ICE Futures U.S. expanded for a sixth consecutive month, the longest streak in three years. At the same time, soybeans jumped 7.9 percent, the most since July, as farmers in the U.S. Midwest withheld dwindling supplies from last year’s drought-reduced harvest.

Gold futures on the Comex in New York fell 5.4 percent, after tumbling 7.8 percent in April when the metal entered a bear market. Copper on the London Metal Exchange climbed 3.6 percent, the first monthly gain since January, as some traders who were betting on lower prices bought back contracts after mining was suspended in Indonesia at Freeport-McMoRan Copper & Gold Inc.’s Grasberg, the world’s second-largest copper mine.

“Agriculture markets are generally seeing ample supply keeping a lid on prices apart from some old crops where inventories are low from last summer’s much-reduced harvest,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “Precious metals are still struggling to come to terms with higher bond rates and subdued inflation.”

Brent oil dropped 1.9 percent in May to $100.39 a barrel, the fourth consecutive monthly decline. It may rebound to about $110 a barrel in the next few months, Hansen said.

“Geo-political worries are primarily priced through Brent as U.S. inventories of crude oil are at a record high but not easily exported so any supply worries impacts Brent the most,” Hansen said.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7; Lu Wang in New York at lwang8; Claudia Carpenter at ccarpenter2

To contact the editor responsible for this story: Dave Liedtka at dliedtka

B. regardsFelix(Kyung) Seo

US Economy

Treasuries Drop With Gold; Dollar Gains, Stocks Fluctuate

Treasuries and gold fell while the dollar rallied as better-than-forecast reports on business activity and consumer confidence bolstered speculation the Federal Reserve will scale back its bond purchases. U.S. stocks fluctuated at the end of a seventh straight monthly gain.

Ten-year Treasury yields increased three basis points to 2.14 percent and the Dollar Index, a gauge of the currency against six major peers, jumped 0.4 percent to 83.39 at 12:03 p.m. in New York. The Standard & Poor’s 500 Index swung between gains and losses near the 1,654 level, poised for a monthly advance of 3.5 percent. The Stoxx Europe 600 Index dropped 0.9 percent. The S&P GSCI gauge of 24 commodities slid for a third day, losing 0.7 percent as gold and oil fell more than 1 percent.

Government bonds are headed for the worst month since 2004 as investors weigh prospects that the Fed will taper asset purchases as the economy improves. Business activity in the U.S. rebounded in May, with the MNI Chicago Report’s barometer rising to 58.7 to exceed all forecasts in a Bloomberg survey and reach the highest since March 2012. The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007.

“This is actually saying the economy is expanding,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It puts the Fed in check. They are not sure what to do. Views are all over the place, legitimately.”

Bonds, Stocks

U.S. two-year note yields rose one basis point to 0.30 percent and 30-year rates increased four basis points to 3.31 percent. The dollar strengthened against 14 of 16 major peers, climbing 0.6 percent to $1.2975 per euro.

The seven-month rally in the S&P 500 is the longest stretch of gains since 2009. The gauge has retreated about 1 percent from a record high on May 21 as investor’s debate the Fed’s plans.

Another report today showed household purchases, which account for about 70 percent of the economy, dropped 0.2 percent last month, the Commerce Department reported. The economy grew an annualized 2.4 percent pace in the first quarter, down from a preliminary reading of 2.5 percent, government data released yesterday showed.

Alcoa Inc., Intel Corp. and DuPont Co. rose more than 1 percent for the biggest gains in the Dow Jones Industrial Average today. Pall Corp. retreated 3.8 percent after lowering its earnings forecast. American International Group Inc. slid 2.5 percent after saying it hasn’t received a deposit in the sale of its plane-leasing unit. Netflix Inc. rallied 2.1 percent on a report that it will be added to the Nasdaq 100 Stock Index in June. Dell Inc. climbed 0.8 percent as shareholders sued founder Michael Dell, the company’s board and private-equity partners over their bid to take the computer maker private.

Changes by MSCI Inc. to its global and U.S. equity indexes will be implemented at the close of trading today. The process known as rebalancing can lead to swings in affected stocks. The additions and deletions of stocks to gauges such as the MSCI All-Country World Index and the MSCI World Index of developed-market equities were announced on May 15.

Almost four shares retreated for every one that gained in the Stoxx 600 today, as 18 of 19 industry groups fell. The index has rallied for the past 12 months, the longest winning streak since 1997.

European Movers

Royal KPN NV, the Dutch phone operator, and Salzgitter AG (SZG), Germany’s second-largest steelmaker, dropped more than 4 percent as analysts downgraded the shares. PostNL NV rallied 6.9 percent after the Dutch mail-delivery company raised its profit forecast.

The MSCI Emerging Markets Index fell 0.7 percent, declining 3.2 percent in May, the most in a year. India’s Sensex slid 2.3 percent, its biggest daily slump in more than a year, after the economy grew less than 5 percent for a second quarter. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong sank 0.9 percent before a manufacturing report tomorrow.

To contact the reporters on this story: Michael P. Regan in New York at mregan12; Susanne Walker in New York at swalker33

To contact the editor responsible for this story: Lynn Thomasson at lthomasson