Global Bond Rally Near `Panic' Level With Japan Yield Below Zero

Searching the Bond Market For Clues on Rates
  • U.S. 10-year yields touch one-year low as equities slump
  • Fed Chair Yellen begins testimony to Congress on Wednesday

Worldwide gains in sovereign bonds sent Japan’s benchmark 10-year yield below zero for the first time and have guided U.S. Treasuries to the best start to a year since 1988 as investors seeking the safest assets gorge on government debt.

Yields on Treasury 10-year notes touched the lowest in a year while those on short-dated German securities slid to a record, as U.S. stocks followed shares in Europe and Asia lower. Volatility in Treasuries reached the highest since September as the U.S. sold $24 billion in three-year debt at the lowest yield in almost two years.

There’s now $7 trillion of government debt with yields below zero globally, with the average yield on the Bank of America Merrill Lynch World Sovereign Bond Index at 1.29 percent, the lowest in data going back to 2005. Futures traders pared the odds the Federal Reserve will raise interest rates this year to 32 percent before Chair Janet Yellen begins her two-day testimony to Congress on Wednesday.

“Global risk aversion is being driven by underlying concerns about banks, energy prices and equity markets, and that is one part of what is driving Treasury yields lower,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. The other “is genuine expectations of weaker U.S. inflation and economic growth. So Yellen will be huge for the markets this week.”

The benchmark 10-year Treasury yield fell two basis points, or 0.02 percentage point, to 1.73 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. It touched 1.68 percent, the lowest since February 2015. The 2.25 percent security due in November 2025 was at 104 22/32.

Global Yields

Treasuries have gained about 3.4 percent in 2016, the most in the same period during any year since 1988, according to Bank of America Merrill Lynch index data.

A gauge of demand at Tuesday’s auction was the least since 2009 as the three-year notes sold at a yield of 0.844 percent, the lowest since March 2014. It was the first of three note and bond sales this week totaling $62 billion.

“This is really specific to how low yields are and what is going on in the front end of the yield curve with the Fed outlook,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, referring to Tuesday’s auction demand.

Japan’s 10-year bond yield fell as low as minus 0.035 percent, an unprecedented level for such a maturity in a Group-of-Seven economy. Volatility in the nation’s debt market climbed to the highest since July 2013.

“It’s almost like a panic,” said Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management. “The flight to quality is exaggerated.”

A bond-market measure of inflation expectations known as the 10-year break-even rate fell as low as 1.17 percent, the smallest since March 2009. The gauge, which measures the difference between yields on nominal 10-year notes and inflation-protected securities, ended last year at 1.58 percent.

The bond market’s outlook for inflation over the next decade is too sanguine, according to Pacific Investment Management Co.’s Mark Kiesel.

“There is significant value” in Treasury Inflation Protected Securities, Kiesel, who co-manages Pimco’s Total Return Fund in Newport Beach, California, said in a Bloomberg Television interview Tuesday.

The Fed has failed to get its preferred gauge of inflation to its 2 percent target since 2012. Yet wages are improving. Hourly earnings rose 2.7 percent in December from a year earlier, the most since 2009, according to the Labor Department.

Rising Volatility

About 29 percent of the debt in the Bloomberg Global Developed Sovereign Bond Index yields less than zero. Switzerland’s 3 percent notes due in 2018 had the lowest yield in the gauge: minus 0.95 percent, according to data compiled by Bloomberg.

The pace of swings in U.S. government-debt yields has been rising, with normalized volatility on three-month options for 10-year U.S. interest-rate swaps, known as 3m10y swaptions, reaching 95 basis points Tuesday, its highest since July. The gauge of volatility on swap rates mirrors movements in options on Treasury futures. Swap rates serve as benchmarks for investors in many types of debt, including securities backed by mortgages and auto loans.

The Bank of America Merrill Lynch’s MOVE Index, which tracks one-month option projections for the pace of swings in Treasuries maturing in two to 30 years, rose to 89.27 Monday, its highest since September 2015.

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