Treasuries Surge as Global Investors Clamor for Government Debt

  • Japanese 10-year yields extend record push below zero
  • U.S. auctions $24 billion in three-year notes at 1.039% yield

Treasuries surged, with U.S. 10-year yields falling by the most in more than two weeks, after a steep rally in Japanese debt carried through into global markets.

Benchmark U.S. notes gained after an auction of 30-year Japanese securities at a record-low yield drew the strongest demand in almost two years. Reports showing a slump in Chinese exports and a contraction in Japan’s economy boosted haven demand for sovereign debt. The U.S. sold $24 billion of three-year notes Tuesday, the first of three auctions of coupon-bearing securities this week totaling $56 billion.

“A lot of it has to do with relative value compared to other developed economies’ low yields” for long-term debt, said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC. “Clearly, there is demand, but the question is, if this continues through tomorrow and Thursday, will it get too expensive?”

Global financial-market turmoil has driven haven demand for sovereign debt and pushed Treasuries to a 2 percent return this year after a rally sent benchmark 10-year yields in February to their lowest since 2012. At one point last month, the Federal Reserve Bank of New York’s measure of term premium, or the extra compensation longer-term bond investors demand for risks such as rising interest rates or accelerating inflation, fell to the lowest on record.

Japanese Yields

U.S. 10-year yields, a benchmark for interest rates around the world, fell eight basis points, or 0.08 percentage point, to 1.83 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 climbed 22/32, or $6.88 per $1,000 face amount, to 98 1/8.

The gap between two- and 30-year Treasury yields, known as the yield curve, touched the narrowest since 2008. A narrowing yield curve historically suggests slowing economic growth and inflation.

“As you see global yields drip lower, that plays into everyone’s perception of where inflation is headed,” said Michael Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $313 billion. “That’s where the domestic buyers are finding a way to justify these low Treasury yields.”

Yields on Japan’s 30-year sovereign debt plunged 22 basis points, falling to 0.475 percent after earlier touching a record low of 0.468 percent. Japan’s 10-year yield fell to an all-time low of minus 0.1 percent, according to Japan Bond Trading Co.

“The outcome of 30-year JGB auction was strong,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. “I’m surprised there are people out there that would buy at this level.”

Goldman Sachs Group Inc. analysts said in a report last week that movement in Japanese debt is defining the direction of global sovereign-bond markets.

The U.S. auctioned $24 billion in three-year notes at a yield of 1.039 percent, up from a 0.844 percent yield at last month’s sale. The bid-to-cover ratio, a gauge of demand, fell to 2.71, the lowest since July 2009, from 2.74 at February’s sale.

Chinese exports tumbled 25 percent in dollar terms in February from a year earlier. Japan confirmed earlier data showing its economy contracted in the final quarter of 2015. The Shanghai Composite Index closed up 0.1 percent after falling by as much as 3.3 percent earlier.

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