Memo to bond investors: The European Central Bank's devotion to maintaining "price stability" doesn't include your securities.
June has started with another vicious selloff in eurozone government bonds. The move has gone global, dragging U.S. Treasurys and U.K. gilts in its wake.
But if investors were pinning their hopes on ECB President Mario Draghi to calm things down, they would have been severely disappointed. Ten-year German yields vaulted again Wednesday to 0.89%, versus under 0.5% at the end of last week; 10-year Treasury yields rose to levels last seen in November.
That was despite a slightly downbeat message from Mr. Draghi that might normally have buoyed bond prices. Mr. Draghi acknowledged that while the eurozone recovery was continuing, there had been a loss of momentum, mainly due to external factors. As expected, he underlined that the ECB wasn't going to pull back from quantitative easing anytime soon: If anything, he held out the possibility of providing more stimulus if needed.
But asked if the ECB would do anything to tame recent bond-market volatility, Mr. Draghi was clear: The answer was no. That didn't reassure jittery investors.
Some of the correction is healthy. When German 10-year yields hit 0.05% in April, the market had lost touch with reality. It was already clear that the eurozone economy was faring better than many expected. While inflation expectations were rising, albeit slowly, nominal bond yields continued to fall: a strange state of affairs.
On that view, the rise in yields is an overdue correction to a market that had become far too pessimistic on the outlook for growth and inflation and which simply ran out of buyers willing to bet on ever-higher bond prices.
Bond markets might want to pin the blame on the ECB's bond-purchase program and market distortions. Yet it was a puzzle that yields continued to fall so steadily even after quantitative easing was announced in January and particularly after purchases started in March. Markets should have already priced in ECB buying by then.
One factor was that the ECB said it wouldn't buy bonds yielding less than minus 0.2%. The further yields fell—and even five-year German yields came close to that level in April—the more long-dated bonds rallied, since the ECB would be forced to buy them.
But markets were thus extremely vulnerable if the trend reversed and more bonds became eligible for ECB purchase. The pressure to buy long-dated bonds would vanish. Unfortunately for bondholders, that happened when yields were already so low that they provided no cushion against falling prices.
Still, the speed of this week's move is startling. Citigroup says it is the biggest two-day rise in 10-year Bund yields since 1998. Overly volatile markets can cause spillover effects, as investors may start to sell other assets to offset the moves. So far, equities and corporate bonds are proving resilient.
Mr. Draghi said markets would just have to get used to higher volatility, a stance that might yet cause him problems if the turmoil leads to tighter financial conditions.
But for now, his message to investors is clear: You're on your own.
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