Treasury yields extended their fall on Wednesday amid reports that the Federal Reserve and the European Central Bank could appoint potentially dovish members to key positions.
The Securities Industry and Financial Markets Association recommends the bond market close early at 2 p.m. in observance of July 4 holiday.
What are bond markets doing?
The 10-year Treasury note yield TMUBMUSD10Y, -1.26% fell 2.6 basis points to 1.952%, its lowest since Nov. 8, 2016. The 2-year note rate TMUBMUSD02Y, +0.02% was mostly unchanged at 1.765%. The 30-year bond yield TMUBMUSD30Y, -1.43% slipped 4 basis points to 2.467%, its lowest since Oct. 2016 Bond prices move in the opposite direction of yields.
The German 10-year government bond yield TMBMKDE-10Y, -3.64% slid 2 basis points to negative 0.39%, pushing deeper into negative territory. Meanwhile, the Italian 10-year government bond yield TMBMKIT-10Y, +4.01% plummeted 26 basis points to 1.60%.
What’s driving Treasurys?
European rates fell after the International Monetary Fund’s head Christine Lagarde was nominated by European leaders to succeed Mario Draghi as the next president of the European Central Bank. Her lack of a monetary policy background has left some market participants unsure of her leanings but many investors say she is expected to continue Draghi’s loose policies.
As for the Fed, President Donald Trump had nominated Judy Shelton, a longstanding critic of the U.S. central bank’s policies, and Christopher Waller, the executive vice president of the Federal Reserve Bank of St. Louis, to the Federal Reserve Board. Both are viewed as candidates who will favor a more dovish monetary policy stance.
Bonds also rallied after a softer-than-expected private-sector payrolls report, suggesting cracks could be forming in the ultra-tight labor market. Automatic Data Processing reported June’s private-sector payrolls rose to 102,000, from 41,000 in May. Still, it fell short of the 140,000 expected by economists.
The trade deficit widened to a negative 55.5 billion in May, while the ISM nonmanufacturing index for June fell to 55.1%. Any reading above 50% is considered an expansion of economic activity.
What did market participants say?
“Treasury prices spike higher on news of Christine Lagarde being nominated for the head of the ECB as well as Trump looking to appoint two dovish Fed Governors to the board,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.
“The U.S. economy seems to be really late in the cycle, whether that means some kind of slowdown is imminent or we’ll move along for a while. Either way, it seems difficult to imagine a reacceleration phase right now,” said Tom Graff, head of fixed-income at Brown Advisory, in an interview with MarketWatch.