Bulls run for the exit

Rising concerns about the global economy triggered a “flash crash” in US Treasury yields on Wednesday, as losses spread across stock markets and a new wave of investors appeared to give up on their bullish bets.

The yield on a 10-year Treasury, a key barometer of the strength of the US economy, fell below 2 per cent for the first time since the Federal Reserve began talking about removing its monetary stimulus in May 2013.

Dealing desks scrambled to make sense of the scale of the drop. Yields fell from 2.19 per cent to 2 per cent in the hour after the release of weak US retail sales, and then plunged to 1.86 per cent in a matter of moments. They had rebounded to 2.13 per cent by late afternoon in New York.

Trading volumes soared, with a record $924bn in US government debt changing hands throughout the session, according to ICAP data.

The gyrations in the US bond market followed steep falls in European share prices earlier on Wednesday. The FTSE Eurofirst 300 dropped 3.2 per cent – the index’s biggest one-day fall since late 2011. The US S&P 500 fell as much as 3 per cent to 1,820 before closing 0.8 per cent lower on the day.

Investors are reassessing their expectations for global growth amid concerns of deflation in the eurozone, weakness in emerging markets and falling oil prices.

Iain Stealey, fixed income portfolio manager at JPMorgan Asset Management, said: “We have this environment in which Fed quantitative easing is ending, expectations about global growth and inflation are falling, and so people want risk-free assets, which means ‘buy US Treasuries’.”

The drop below 2 per cent triggered stop-loss buying of Treasuries from hedge funds and other investors who had bet on a gradually improving economy and rising interest rates. Bank dealing desks raced to cover their own short positions. Yields move inversely to prices, so falling rates reflect rising demand for bonds.

Traders also mentioned a research note from Goldman Sachs telling clients to abandon a lossmaking bet on rising yields on the 3-year Treasury note, which it had recommended in June.

“Fear brings on fear,” said Ray Nolte, chief executive of SkyBridge, a fund of hedge funds. “Funds had not been bailing out on their positions exactly, but risk is being taken down, losses are being taken, and that is prudent given the level that volatility has moved up to.”

The move in Treasuries was the biggest single-day swing since the depths of the credit crisis in 2009.

“We were watching in astonishment,” said Adrian Miller, director of fixed-income strategy at GMP Securities. “Having the 10-year note trade at these levels, back where we were before the Fed taper talk, it’s extraordinary. There is no place to hide if you are pro-risk.”

There were also big sell-offs on equity markets. In the UK, the FTSE 100 closed down 2.8 per cent, its biggest one day fall since June last year. Italy’s main share index ended down almost 4.5 per cent.

Larry Fink, chief executive of BlackRock, the world’s largest asset manager, called the sell-off a buying opportunity.

“What they were not seeing through the darkness is that the oil price decline is a tax cut for global consumers,” he said.

Tom Tucci, head of US government bond trading at CIBC World Markets, said the surge of buying of Treasuries reflected panic and cooler heads prevailed. “What is more important is the sharp and quick reversal that followed. That is telling us that markets have rejected that trade.”

Additional reporting by Tom Braithwaite and Camilla Hall in New York