US Treasury yields touch record lows
New York (July 2) US Treasury yields kicked off the second half of the year by slumping to record lows as investors bet that the U.K.’s vote to leave the European Union would prevent the Federal Reserve from raising interest rates this year.
But yields quickly bounced off their lows after a report showed U.S. manufacturing activity in June improved to its strongest level in 15 months.
At the end of the shortened trading day, the yield on the two-year note TMUBMUSD02Y, +0.00% was 0.593%, down 0.4 basis point.
Meanwhile, the 10-year TMUBMUSD10Y, +0.00% finished the session 4.6 basis points lower at 1.446%. The 30-year TMUBMUSD30Y, +0.00% fell 8.2 basis points to 2.226%. Because of their inverse relationship, bond yields fall when demand drives up prices.
Earlier, the yield on the 10-year U.S. Treasury note fell to a record-low 1.378%, passing previous lows reached in the summer of 2012. The 30-year yield hit a record low of 2.187%.
Yields have steadily declined since the beginning of the year as the Fed has been reluctant to raise interest rates, and anxieties about the global fallout from a Brexit vote stoked demand for haven assets.
Treasury prices rose Friday even as German bunds TMBMKDE-10Y, +0.00% edged lower and U.S. stocks SPX, +0.19% moved higher, on track to rise for a fourth straight day.
One reason for Treasurys’ outperformance could be their relatively high yields, said David Schnautz, a fixed-income strategist at Commerzbank. With $11.7 trillion in high-grade European and Japanese debt offering negative yields, foreign investors seeking higher returns are increasingly turning to U.S. debt markets.
“However you look at it, it’s remarkable how strong they’ve performed,” Schnautz said. “It’s not even a risk-off day.”
But some analysts said the move higher in yields likely had more to do with technical trading factors, as thin trading volumes ahead of a long holiday weekend in the U.S. exaggerated moves in asset prices.
“This post-Brexit world has a lot of volatility and unknowns that are going to remain with us for the summer,” said Marvin Loh, global markets strategist at BNY Mellon.
The International Monetary Fund has warned that negative repercussions from Brexit will spread beyond the U.K. and Europe. Fed officials haven’t said how the vote might influence the timing of the next rate increase.
The decline in short-term yields was much smaller than the drop in longer-dated bonds, an environment known as a “bull flattener.” This type of trading activity typically means investors expect interest rates to rise at a slower pace, market strategists said.
The reverse is true, too; a bull-steepening suggests that investors are more optimistic about longer-term economic prospects, which could lead to higher interest rates.
Yields on U.K. government bonds TMBMKGB-10Y, +0.00% known as gilts, also fell to record lows.
German yields tick higher, but remain near record lows
German yields edged higher, but remained near record lows reached on Thursday.
The yield on the 10-year bund TMBMKDE-10Y, +0.00% rose 0.2 basis point to minus 0.130%, according to Tradeweb.
Meanwhile, investors continued to buy up the debt of the so-called peripheral European countries, sending yields sharply lower.
Italian and Spanish bond yields also neared record lows. The Italian 10-year yield TMBMKIT-10Y, +0.00% slumped 11.6 basis points to 1.142%. The Spanish 10-year yield TMBMKES-10Y, +0.00% fell 7.9 basis points to 1.150%.
A report Thursday that the European Central Bank was weighing changes to the rules that dictates bond purchases under its monthly asset buying program sparked a rally in Italian and Spanish debt, pushing yields near record lows. Yields remained sharply lower despite a conflicting report saying no such change was being considered.