- Term premium shows investors accept yields below fair value
- Yield on German 10-year bond declines to all-time low
Treasuries gained for a second day as the U.S. prepares to issue $20 billion of 10-year debt, the second of three note and bond auctions this week.
With yields on the debt near a two-month low, pre-auction trading of the securities on offer Wednesday signals they will be sold at a yield close to what was achieved at last month’s sale, which was the lowest in more than three years. The term premium, a gauge of the perceived riskiness of longer-dated securities, last week dropped to the lowest in at least half a century.
A weaker-than-forecast U.S. jobs report last week and concern that the U.K.’s June 23 referendum on the nation’s European Union membership will unleash market turmoil globally have driven demand for safety. Treasuries also have appeal because U.S. yields are high compared with those in markets such as Japan and Switzerland, which have have negative yields for debt maturing in a decade and longer. Federal Reserve Chair Janet Yellen on June 6 said gradual interest-rate increases are appropriate, without specifying precise timing.
“With her comments on Monday, Chair Yellen was buying time again,” which has boosted demand for U.S. debt, said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “It makes sense for the Fed to buy a little more time” with the latest data “on the economic front, with Brexit possibilities, and other uncertainties.”
Benchmark Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 1.70 percent as of 10:11 a.m. in New York, according to Bloomberg Bond Trader data, near the lowest since April 7. The price of the 1.625 percent security maturing in May 2026 was 99 10/32.
Simko’s firm is betting the gap between short-term and long-term U.S. debt yields will narrow, and would buy 10-year notes if yields rise to levels between 1.8 percent and 1.9 percent.
Germany’s 10-year bund yield declined to a record 0.033 percent Wednesday, while that on the Bloomberg Global Developed Sovereign Bond Index dropped to 0.619 percent a day earlier, the lowest level in data going back to 2010. The German 10-year yield is approaching zero, a milestone that Commerzbank AG said may be breached as soon as this week.
The U.S. sold $24 billion of three-year notes Tuesday and plans to auction $12 billion of 30-year bonds Thursday.
The May 2026 securities scheduled to be sold Wednesday yielded 1.705 percent in pre-auction trading, compared with 1.71 percent at a previous sale of 10-year bonds on May 11, which was the least since December 2012.
The New York Fed’s gauge of the 10-year Treasury term premium dropped to negative 0.47 percentage point at the end of last week, the lowest level since 1962. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The futures market implies an 18 percent probability of a rate increase by July, according to data compiled by Bloomberg. A day before the May jobs report, traders assigned a 55 percent probability.