Global Negative-Yield Pool Deepens as Treasuries Rally to Record

Why Treasury Bond Yields Are at Record Lows
  • Yields on 10-year, 30-year securities close at all-time lows
  • Bonds continue surge as market resumes after July 4 holiday

Treasuries rallied, with 10- and 30-year yields closing at record lows, as the growing pool of negative-yielding debt worldwide boosted the appeal of U.S. securities.

Benchmark yields fell to unprecedented levels as signs of slowing growth in Europe ended a five-day rally in global stocks. A U.S. jobs report July 8 may offer clues to the direction of the Federal Reserve’s next interest-rate move.

The probability in futures markets of tighter U.S. policy this year plunged after the U.K. vote last month to leave the European Union clouded the outlook for global growth. The dimming prospect of a Fed hike has spurred a torrent of demand for Treasuries, with almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index yielding less than zero, up from about $9 trillion a week ago. In addition to experimenting with negative rates, some monetary authorities abroad are buying government debt, reducing the supply for investors who count on fixed-income assets.

“When you look at pension liabilities, insurance, where are you going to get a positive yield?” Jim Caron, a senior fixed-income portfolio manager at Morgan Stanley Investment Management, which oversees about $400 billion, said in an interview on Bloomberg Television. The yield on U.S. Treasuries “is not a lot relative to history, but at this point, it’s the best the market can do.”

Bull Market

The benchmark Treasury 10-year note yield dropped seven basis points, or 0.07 percentage point, to 1.375 percent at 5 p.m. New York time, below the previous record-low close of 1.3875 in July 2012, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 rose to 102 9/32.

The 30-year bond yield fell seven basis points to close at a record 2.1545 percent, extending a bull market for Treasuries that began in the early 1980s, when yields on both 10-year and 30-year debt peaked above 15 percent.

Treasuries trading was closed globally July 4 for the U.S. Independence Day holiday.

“The intermediate to long-end seems to be the place to be -- everyone is searching for yield,” said Jim Davis, a money manager for private clients at U.S. Bank, which oversees $133 billion. “Interest-rate risk isn’t there. Investors don’t really see a backup in rates coming, so they feel more secure owning those bonds.”

The chance of a Fed rate increase by year-end stands at about 8 percent, from 59 percent a month ago, according to fed fund futures data compiled by Bloomberg, as signs point to slowing global growth after the U.K. referendum. 

Economic Data

A measure of U.K. business confidence dropped sharply following the vote, a report showed on Tuesday. Across Europe, purchasing managers indexes for manufacturing and service showed lackluster growth.

That spurred a rally in debt across Europe, sending 10-year yields in Denmark below zero. In total, 10 developed countries have securities due in a decade that yield 0.2 percent or less.

Treasuries investors will watch this week for the Labor Department’s June payrolls report. Economists estimate employers added 180,000 positions last month, after an increase of 38,000 jobs in May, the least since 2010.

“This is the most obvious manifestation of the global search for yield forcing investors further out the curve,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “The size of the drop in the 30-year yield reflects a bit of a capitulation trade, but I am not particularly surprised. The market is now trying to work out what the new range will be.”

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