Treasury Volatility Jumps as Yields Drop to Records Around World

  • Aversion to risk driven by rising likelihood of a Brexit
  • German 10-year bund yields fall below zero for the first time

Treasuries advanced and a measure of their volatility surged to a three-month high as investors sought the relative safety of fixed-income securities amid concern the U.K. will vote to quit the European Union.

U.K. gilts returned 2.2 percent in the past month, the most among 26 sovereign-debt markets tracked by Bloomberg, and their 10-year yields tumbled to an all-time low Tuesday.

Yields dropped to unprecedented levels across much of the world, with Germany’s 10-year bund yield sliding below zero for the first time and Japan’s and Australia’s reaching all-time lows, extending a record global rally. U.S. Treasuries briefly pared gains after a stronger-than-forecast U.S. retail sales report for May.

Four polls suggested Britain is on course to leave the EU in its referendum June 23, with the vote emerging as this week’s main focus even as central banks in the U.S., Japan and the U.K. hold policy meetings. The yield on the Bloomberg Global Developed Sovereign Bond Index dropped to a record 0.58 percent Monday.

“Investors are reducing risk into the major event,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “We’re likely to see more of this before the referendum vote.”

On the MOVE

Treasury 10-year yields fell three basis points, or 0.03 percentage point, to 1.58 percent as of 8:50 a.m. in New York, after touching the lowest since February, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 was at 100 12/32.

The Bank of America Corp. MOVE Index, which measures price swings in U.S. debt, climbed to the highest since March 14. The Bloomberg U.S. Treasury Index rose to the highest since it began in 2010.

Germany joined Japan and Switzerland in having 10-year bonds yielding less than zero, and boosted the amount of euro-zone bonds with negative yields to more than $2.8 trillion. Japan’s 10-year yield fell to as low as minus 0.175 percent. Australia’s slid to 2.05 percent while the U.K.’s touched 1.141 percent.

For more on the drop in German bund yields to below zero, click here.

“The big event will be the Brexit vote,” said Kim Youngsung, head of overseas investment in Seoul at South Korea’s Government Employees Pension Service, which has $12.8 billion in assets. “There’s a high possibility Brexit will take place. Bond prices will go up again if it happens.”

Kim said he already owns corporate and government securities in the U.S. and is reluctant to buy more because it isn’t a sure thing that Britons will vote to leave the EU.

Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, said he favors the biggest, most liquid markets including the U.S., Germany and Japan in the run-up the U.K. poll. “Riskier assets are under pressure,” said Katayama, one of the investors for about $51 billion in assets at the firm.

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