Wed. Feb 1st, 2023

The yield on the benchmark 10-year Treasury note closed below 1.5%, its lowest level in more than three months, dragged down by tepid economic data and high demand from investors both in the U.S. and elsewhere. 

The yield on the 10-year Treasury note, which helps set borrowing costs on everything from corporate debt to mortgages, closed at 1.489%, according to Tradeweb, its lowest settle since March 3. That was down from 1.527% Tuesday.

The move extends a recent drift lower that began after Friday jobs data showed a less robust labor-market recovery than expected. That eased investors’ worries that hefty hiring and wage gains would spur inflation, forcing the Federal Reserve to start withdrawing easy-money policies sooner than expected. 

Bond yields, which rise as prices fall, tend to rise when investors are expecting growth and inflation, which can spur the Fed to raise interest rates, and fall when the outlook darkens. 

“Bond market participants looking for a market changing narrative are likely disappointed by the May jobs report,” said JPMorgan Chase & Co. interest-rate strategists in a note to clients. “It’s not that the numbers were bad, indeed they were good…but not good enough.”

Mixed signals around the U.S. economic recovery left the 10-year yield trading in a range around 1.6% for months, ending an early-year climb spurred by investors’ bets that a stimulus-powered recovery would fuel inflation. A key measure of investors’ expectations for average annual inflation over the next 10 years, known as the 10-year break-even rate, slipped last week.

Analysts said other factors are driving lower yields, including a weaker dollar, which has lifted demand for Treasurys from foreign investors. Foreign investors tend to hold more Treasurys when the dollar declines and reduces the costs of protecting against swings in currencies. 

At The Wall Street Journal’s CEO Council Summit, Janet Yellen expressed her confidence that the U.S. economy and employment will return to normal by next year.

That decline has been enough to make Treasury yields attractive on a relative basis for investors in Europe and Japan, according to a recent report by NatWest Markets. Japanese investors have added about $19 billion in Treasurys this year through March, the last month for which data are available.  

Federal Reserve holdings of U.S. securities on behalf of foreign central banks has increased by $40 billion, according to NatWest.

Hedge funds that shift stock and bondholdings based on volatility in markets are snapping up Treasurys.

John Briggs,

head of strategy for Americas at NatWest, said 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 moved money from stocks into bonds in recent weeks.   

“Fixed income allocations currently stand at 75.6%, the largest since November of 2020,” Mr. Briggs said in an email. “With the overall fixed income allocation rising, this suggests additional demand for U.S. Treasurys.”

Gennadiy Goldberg,

a U.S. rates strategist at TD Securities, said some investors who were short bonds have cut their positions ahead of Thursday’s monthly inflation report and next week’s Fed meeting, also fueling the drop in yields.

“Combined with a break of the 1.50% level in the 10-year, this may be pushing rates lower disproportionately,” said Mr. Goldberg.

Investors say the likelihood of yields falling further is low, given unprecedented levels of fiscal stimulus and plans for spending on things like infrastructure. Most economists and traders also expect hiring to pick up once children return to school and employees re-enter the workforce. 

“The outlook for the labor market over the near term is unclear,” said Michael de Pass, global head of U.S. Treasury trading at Citadel Securities.” The impact of extended benefits and the time it will take for participants to return to the labor market means a true read is a few months away.”

A Treasury Department auction of new 10-year notes met strong demand from investors, reversing a slight intraday rebound that drove the 10-year back above 1.5% in the early afternoon. 

Yields declined after asset managers and other buyers scooped up the majority of the new government debt, leaving bond dealers with about 16% of the securities compared with an average of around 24%. Treasury prices often rise when dealers win lower shares at the auctions, a sign of strong demand from investors.

Write to Julia-Ambra Verlaine at [email protected]

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By rahul