Sovereign bonds surged, sending japan benchmark 10-year yield below zero for the first time, as investors seeking the safest assets gorged on government debt.
Treasury yields dropped to some one-year low and those on short-dated German securities dropped to records in the rush to refuge from the worldwide stock rout. Traders pared the chances the Federal Reserve will raise interest rates this year to 30 per cent, before Chair Janet Yellen begins her two-day testimony to Congress on Wednesday.
It’s almost like a panic or anxiety. The flight to quality is exaggerated
There is now US$7 trillion of government debt with yields below zero globally, with the average yield around the Bank of the usa Merrill Lynch World Sovereign Bond Index at 1.29 per cent, the least in data that go back to 2005.
“It’s almost like a panic,” said Hideo Shimomura, the main fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management. “The flight to quality is exaggerated.”
The benchmark 10-year Treasury yield declined two basis points, or 0.02 percentage point, to 1.73 per cent by 8:29 a.m. working in london, according to Bloomberg Bond Trader data. The two.25 % security due in November 2025 rose 6/32, or US$1.88 per US$1,000 face amount, to 104 21/32. The yield was as low as 1.68 per cent, a level not seen since February 2015.
Japan’s 10-year bond yield fell so far as minus 0.035 percent, an unprecedented low for this type of maturity in a Group-of-Seven economy. Volatility within the nation’s debt market climbed to the highest since July 2013.
All German bonds maturing in eight years or less have negative yields, while 10-year bund yields dropped to 0.19 per cent, the cheapest since April. Australia’s dropped as low as 2.38 per cent, also unseen since April.
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The rally this year has added US$1.4 trillion, or 3 percent, towards the market value of the Bank of the usa Corp. Global Broad Market Index.
About 29 per cent from the outstanding debt within the Bloomberg Global Developed Sovereign Bond Index was yielding less than zero as of Monday. Switzerland’s 3 percent notes due in 2018 had the lowest yield within the gauge, negative 0.95 percent, according to data compiled by Bloomberg.
Investors rushed to bonds Tuesday as the MSCI Asia Pacific Index of stocks slid 2.9 percent and Japan’s Topix Index plunged 5.5 per cent.
Equities Rout
“It’s difficult to find grounds to short Treasuries,” said Tomohisa Fujiki, head of interest-rate strategy for Japan for BNP Paribas SA in Tokyo, talking about bets that a security will fall. Turmoil “has become affecting equity markets in civilized world as well – and commodities and emerging markets have not stabilized yet.” BNP is among the 22 primary dealers that underwrite the U.S. debt.
Yellen is scheduled to look prior to the House Financial Services Committee on Wednesday and will address the Senate Banking Committee the following day. Futures contracts indicate traders see a 30 percent probability of a Fed rate rise in 2016, down from 93 per cent at the start of the year.
Traders who’ve spent 2016 watching oil tumble are swapping crude using their monitors and loading their panels with bond metrics, said John Gorman, the head of dollar debt trading for Asia and also the Pacific at Nomura Holdings Inc. in Tokyo. Nomura is another primary dealer.
The flight to quality gained momentum Monday due to speculation Deutsche Bank AG might have trouble paying its debts, Gorman said. Germany’s biggest bank said in a statement it has a lot more than sufficient means to pay coupons on its riskiest debt both this season as well as in 2017.
“That really spooked the market,” he said. “People immediately thought there’s a problem where banks can’t pay plus they can’t fund themselves to pay. It does seem like we’re reaching a place where the marketplace is panicked.”
Bloomberg.com
