Gold Benefitting After U.S. Bond Futures Hit Six Month Low

Gold prices are moderately higher in early U.S. trading Tuesday, on some short covering, bargain hunting and even some safe-haven demand. A lower U.S. dollar index on this day is also working in favor of the precious metals bulls.

After a brief pause at the end of last week, the global bond rout continued to ripple across markets as many of the most successful trades from the early part of 2015 suffer sharp reversals.

The latest wave of selling was sparked by Monday’s weakness in the U.S. Treasury market, where 10-year yields surged to their highest closing level in more than five months as investors prepared for sales of new debt. They rose further Tuesday to a six-month high before dropping back slightly to yield around 2.24%.

The yield on Germany’s 10-year benchmark bond climbed by 0.09 of a percentage point to 0.68%. Bonds across the euro area weakened by similar amounts. Yields rise as prices fall.

“The dust has not settled yet,” said interest-rate strategists at BNP Paribas.

Before the global bond selloff that started in late April, many investors had grown nervous as the European Central Bank’s bond-buying stimulus program pushed yields to record lows.

“There was a bit too much consensus in a few markets: That we would be in deflation or disinflation for a very long time; that the ECB was buying so many bonds it would overwhelm supply; that the eurozone economy was weak,” said Michael Krautzberger, head of euro fixed income at BlackRock.

With signs that eurozone growth was picking up and a rise in the oil price was heading off fears of deflation, Mr. Krautzberger placed negative bets on German debt in his more flexible portfolios ahead of the selloff.

“We felt that [German] 10-year yields approaching zero was just too low,” he said.

The weakness in bond markets continued to cast a shadow over stocks.

In the U.S., the S&P 500 was trading 0.2% lower as European markets closed. The Stoxx Europe 600 index ended 1.3% lower, breaking a two-day rally.

Equities in Europe have also seen a sharp reversal in the last two weeks, following a strong start to the year, as the turmoil in bond markets forces investors to shed riskier assets from their portfolios. The Stoxx Europe 600 is down 4.1% in the last month, but remains 15.6% higher so far in 2015.

“We are at a crunch point now. A lot of investors will be hitting their risk limits with all the volatility in bonds, so they have to reduce risk by selling equities,” said Andreas Koester, head of asset allocation and currency at UBS Global Asset Management, which oversees $680 billion.

UBS Global has scaled back its government bond holdings and bought put options to lock in gains on its equity holdings.

“We’ve gone into hibernation mode,” Mr. Koester said.

Germany’s DAX tumbled 1.7%, France’s CAC 40 fell 1.1% and the U.K.’s FTSE 100 ended 1.4% lower.

Stocks in the euro area were further weighed down by a sharp rebound in the euro against the dollar. A stronger currency is bad news for European companies, which earn a big chunk of their revenues abroad.

The euro surged 0.8% to $1.123 after Greece repaid €750 million ($836.7 million) to the International Monetary Fund on time.

The British pound also rose, climbing 0.6% against the buck to $1.567, having earlier hit $1.571, its highest level since December, following some strong U.K. manufacturing data.

In commodities markets, Brent crude oil climbed 2.6% to $67.33 a barrel. Gold was up 0.6% at $1,190.40 an ounce.