The yield on the 10-year government bond note closed below 1.5%, the lowest level in more than three months, pulled down by weak economic data and strong demand from investors both in the US and elsewhere.
The dividend on the 10-year government debt line, which helps set borrowing costs on everything from corporate debt to mortgages, closed, according to Tradeweb, the lowest settlement since March 3. It was down from 1.527% on Tuesday.
The move expands a recently lower operation that began after job data from Friday showed a less robust labor market recovery than expected. It eased investors’ concerns that sharp employment and wage increases would spur inflation and forced the Federal Reserve to start withdrawing easy-money policies sooner than expected.
Bond yields, which rise when prices fall, tend to rise when investors expect growth and inflation, which may spur the Fed to raise interest rates and fall when the outlook darkens.
“Bond market participants looking for a story that is changing the market are likely to be disappointed with the job job report in May,”
Mixed signals about the US economic recovery left the 10-year yield trading at a range of around 1.6% for several months, ending an increase in the early years prompted by investors’ bets that a stimulated driven recovery would fuel inflation. A key measure of investors’ expectations of average annual inflation over the next 10 years, known as the 10-year break-even rate, fell last week.
Analysts said other factors are driving lower interest rates, including a weaker dollar, which has lifted demand for Treasury from foreign investors. Foreign investors tend to have more Treasurys when the dollar falls and reduce the cost of hedging against fluctuations in currencies.
This decline has been enough to make government interest rates attractive on a relative basis to investors in Europe and Japan, according to a recent report by NatWest Markets. Japanese investors have added about $ 19 billion in Treasury this year through March, the last month for which data is available.
Federal Reserve holdings of U.S. securities on behalf of foreign central banks have increased by $ 40 billion, according to NatWest.
Hedge funds that trade stocks and bond holdings based on market volatility are snapping up Treasurys. John Briggs, Strategy Manager for America at NatWest, said that so-called risk parity funds, which seek to produce market-beating gains with lower risk by using futures or other derivatives to increase their returns on safer assets such as bonds, have also shifted money from stocks to bonds in recent weeks.
“Fixed-income allocations are currently at 75.6%, the largest since November 2020,” Briggs said in an email. “With the overall fixed income distribution increasing, this suggests further demand for US government bonds.”
Gennadiy Goldberg, a US interest rate strategist at TD Securities, said some investors who were short-term bonds had cut their positions ahead of Thursday’s monthly inflation report and next week’s Fed meeting, which also promotes the fall in interest rates.
“Combined with a break in the 1.50% level in the 10-year-olds, this could possibly push rates lower disproportionately,” said Mr. Goldberg.
Investors say the likelihood of interest rates falling further is low given unprecedented levels of fiscal stimulus and plans to spend on things like infrastructure. Most economists and traders also expect that employment will pick up when children return to school and employees return to the workforce.
“The short-term outlook for the labor market is bleak,” said Michael de Pass, global chief of the U.S. Treasury Department’s trade in Citadel Securities. “The impact of extended benefits and the time it takes for participants to return to the job market means that a true reading is a few months away. ”
An auction of the Treasury Department with new 10-year banknotes met strong demand from investors and reversed a small intraday rebound that drove 10-year returns over 1.5% in the early afternoon.
Dividends fell after asset managers and other buyers repaid most of the new government debt, leaving bond traders with approx. 16% of the securities compared to an average of around 24%. Treasury prices often rise when traders win lower shares at auctions, which is a sign of strong demand from investors.
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