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Bond Report: Treasury yields log 4th straight slide, 10-year briefly dips below 1.6%

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U.S. Treasury yields slipped for a fourth day Wednesday as worries about a resurgence of COVID in Europe fueled buying of sovereign debt.

Investors also interpreted a second day of testimony from Chairman Jerome Powell, who alongside Treasury Secretary Janet Yellen, provided the Senate Banking Committee an update on the state of the economy as it rebounds from the depths of the COVID-19 pandemic.

How did Treasurys perform?
  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.617%

    was at 1.613%, off 2,4 basis points and had touched a low of around 1.59% intraday, FactSet data showed. The benchmark debt ended last week at 1.729% but has slipped for four straight days thus far.
  • The 30-year Treasury bond
    TMUBMUSD20Y,
    2.207%

    was yielding 2.314%, down 3.4 basis points, compared with 2.348% a day ago.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.152%

    was at 0.143%, versus 0.147% on Tuesday.

The 10-year finished at its lowest yield since March 15, while the 30-year, long bond, hit its lowest since March 11, according to Dow Jones Market Data.

What drove fixed-income trading?

Extended business lockdowns in Germany and the Netherlands to combat the coronavirus pandemic have driven appetite for government bonds, dragging yields down so far this week.

Germany has extended its coronavirus lockdown to April 18 as Europe experiences what some have described as a “third wave” of the deadly COVID-19 infection.

Worries about the impact on the economic outlook has driven buying of government debt, with the 10-year German bond
TMBMKDE-10Y,
-0.349%

falling to a yield of minus 0.357%, its lowest in about five weeks. Lower yields abroad have only helped to spur buying in U.S. debt, which is offering comparatively higher returns.

Still, IHS Markit’s “flash” composite, or preliminary, purchasing managers index for the European Union rose to 52.5 in March, compared with 48.8 in February, breaching the 50 mark that is seen as a dividing line between contraction and growth.

A reading of the U.S.’s flash PMI fell to 55.5 in March from 57.1 in February, but still showed improving conditions for manufacturers. New orders dipped to 58.0 from 59.6 and employment fell to 53.9 from 54.1. The slight drop-off in the March PMI comes after the Markit index rose in February to the highest level in almost four years, helped by manufacturers catching up after winter-related softness in January.

Meanwhile, Powell and Yellen’s second day of testimony indicated that they weren’t concerned about a recent rise in long-term bond yields. Powell said that he thought the rise in yields reflected growing optimism about the economic prospects.

“It seems that rates have responded to news about vaccination and ultimately about growth,” Powell told members of the Senate Banking Committee. “And that has been an orderly process.”

Earlier, Atlanta Fed President Raphael Bostic told The Wall Street Journal in an interview published on Wednesday that he expects the central bank to start lifting its interest rates in 2023.

Bostic said the Fed would need to see a sustained period of “strong and robust” inflation for it to lift its policy interest rates.

In other economic reports, a reading on U.S. durable goods orders disappointed, dropping 1.1% in February.

Meanwhile, the market absorbed a sale of some $61 billion in 5-year Treasury notes
TMUBMUSD05Y,
0.807%
,
as the second leg in some $183 billion in auctions this week at the belly of the yield curve.

What did strategists say?

“Following the uneventful 2 yr note auction yesterday, today’s 5 yr was very much blah too with slightly weaker metrics,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a research note.

“Interest rates are not looking for any trouble this week, with almost no selling pressure to speak of. Nor is there any parade waiting to buy Treasuries to force yields through resistance levels formed in the first three weeks of March,” wrote Jim Vogel, executive v.p. at FHN Financial, in a Wednesday note.

“Lower volatility may have compressed spreads to Treasuries, but it certainly provides more time to explore values left behind from the sell-off and to find targeted securities that best match overall portfolio goals,” he wrote.

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