Treasury Yields Plunge to '17 Lows as Global Risk Appetite Sours

  • Benchmark 10-year U.S. yield breaches key 2.3% level
  • U.S.-North Korea tension, French elections spur safety flight

Treasuries surged, with benchmark yields tumbling to the lowest closing levels of 2017, as geopolitical tensions flared up and political risk surrounding the French presidential election intensified.

The 10-year U.S. yield declined by seven basis points to about 2.3 percent at 5 p.m. in New York, the lowest closing level since November. Intermediate maturities led the rally. The 10-year break-even rate extended its decline, dipping below 1.9 percentage points, the lowest since December.

President Donald Trump said on Twitter early Tuesday that “North Korea is looking for trouble,” and that the U.S. would “solve the problem” with or without China. The yen strengthened past 110 per dollar for the first time since Nov. 18. In other signs of waning risk appetite, the S&P 500 index fell while gold rallied. The Chicago Board Options Exchange Volatility Index surged for a third straight day.

  • Treasury’s $20 billion reopening of the 10-year note saw a bid-to-cover ratio of 2.48, down from 2.66 at previous auction; high yield was 2.332%
  • 3Y auction Monday tailed by about 0.5bp and produced the lowest bid-to-cover ratio since July 2009; cycle concludes with $12b 30Y reopening Wednesday
  • Spread between 10-year French and German debt widest since February as polls indicate it may be a four-way race in the French presidential election
  • Holiday-shortened week is expected to curb IG credit issuance; Sifma has recommended 2pm close on April 13 ahead of full close April 14
  • Other key themes in U.S. rates strategy this week include whether market has become overly pessimistic regarding fiscal policy outlook and expected impact on monetary policy, how the Fed is likely to go about shrinking its balance sheet, and what implications would be for the pace of rate increases
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