BOND REPORT: 10-year Treasury Yield Plunges To Six-month Low

Treasury prices rallied Wednesday along with global sovereign bonds, sending the benchmark U.S. yield to a six-month low as investors reacted to low-rate monetary policy signals from the European Central Bank and the Bank of England.

The ECB was said to be preparing measures to combat low inflation, including using negative deposit rates, according to news reports. The Bank of England left its forecasts intact, while signaling that it may be on track to raise its key lending rates next year. The news was largely taken to mean that both central banks would continue to bolster markets with accommodative monetary policies.

On a broader scale, concerns about economic growth prompted the risk-off trade Wednesday, according to Adrian Miller, director of fixed-income strategy at GMP Securities LLC., who called the rally “global in nature.”

“If you continue to get data that questions the market’s expectations that Q2 growth will accelerate, then there is room for downside in yields,” said Miller.

The 10-year note (10_YEAR) yield sank 7 basis points on the day to 2.550%, the lowest level since the end of October on a closing basis, according to Tradeweb. The yield touched an intraday low of 2.525% on Wednesday.

Technical positioning played a role in the run-up in prices as well. The highly watched yield had largely traded between 2.60% and 2.80% for most of the year, but broke definitively through that level on Wednesday, prompting a round of short-covering. Investors who have been bearish on Treasurys have been disappointed many times this year, prompting those with short positions to buy into the market to close out their trades.

“The reversal is pretty brutal. We’ve got to really see an end of this bearish sentiment on Treasurys before we have a selloff,” said George Goncalves, head of interest-rate strategy at Nomura Securities. He sees Treasury yields continuing to drift lower until the short positions are fully expunged from the market.

The 30-year bond (30_YEAR) yield dropped 7.5 basis points to 3.379%, and the 5-year note (5_YEAR) yield dropped 5 basis points to 1.569%.

Treasurys followed European bond prices higher in Wednesday trade. The 10-year German bund yield fell 4.5 basis points on the day to 1.373%, while the 10-year U.K. gilt yield fell 9.5 basis points to 2.585%.

“The break of the 10-year German government bonds under 1.40% is really starting to have a magnetic pull on global rates,” said Goncalves.

By Ben Eisen, MarketWatch