U.S. Treasury yields slipped Wednesday, adding to their recent decline, as European Central Bank President Mario Draghi said the central bank could further postpone a plan to raise eurozone lending rates if data continue to show contraction in the region.
The yield on the 10-year Treasury note TMUBMUSD10Y, -1.93% was off 4.4 basis points at 2.374%, marking its lowest level since December of 2017, according to Dow Jones Market Data. The yield on the two-year note TMUBMUSD02Y, -2.04% gave up 5.7 basis points to a 12-month low of 2.208%, while the 30-year Treasury bond yield TMUBMUSD30Y, -2.27% slipped 5 basis points to a 15-month low of 2.822%.
Yields and bond prices move in opposite directions.
At a conference in Frankfurt, Draghi said the ECB would “continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed,” and emphasized that the central bank remains ready to act.
“If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” he said.
Draghi’s comments come three weeks after the ECB responded to Europe’s recent economic slowdown by signaling it won’t raise its key eurozone interest rate, currently set at minus 0.4%, before next year. The ECB also lowered its forecast for gross domestic product in the region to 1.1% from 1.7%.
The comments also drove further buying of eurozone government paper.
The yield for Germany’s 10-year bond TMBMKDE-10Y, -466.42% known as the bund, tumbled deeper into negative territory, falling to negative 0.082%, compared with negative 0.018% on Tuesday, putting the government debt just shy of its 2016 record low.
See: The persistence of subzero rates in Europe may revive a perilous ‘quest for yield’
Analysts say bunds are viewed as a proxy for the health of the European economy, and are responsible for putting a ceiling on Treasury yields. With a eurozone slowdown knocking on the door, investors say global growth concerns will encourage the market’s expectations for a rate cut this year. The U.S. central bank has cited international headwinds for its reluctance to pursue further rate moves in 2019.
“As the EU continues to face a tough slog, at least in the eyes of bond investors there, U.S. rates are now more confident about a rate cut as early as September,” wrote Jim Vogel, an interest-rate strategist at FTN Financial.
Trading on the fed-fund futures market indicate the chance of a rate cut in 2019 now stands at 78%, CME Group data show.
Market participants also credited an unexpected comment by New Zealand’s central bank overnight, which said that its next rate move would likely be a cut, for the Treasurys rally. Central banks across the world are increasingly drumming a dovish beat, with the Reserve Bank of Australia saying earlier this month that it would leave rates on hold in the face of an uncertain economic backdrop.
Meanwhile, Stephen Moore, President Donald Trump’s nominee for a seat on the Federal Reserve Board, said the central bank should immediately reverse course and cut interest rates by half a percentage point, in interview with the New York Times on Tuesday. That comes as Dallas Fed President Robert Kaplan in an interview with the Wall Street Journal said it was too soon to consider a rate reduction.
On the data front, the U.S. trade deficit for January narrowed 15% to $51.1 billion from $60 billion in December, underlining how U.S.-China tariffs coming into force at the turn of the year weighed on trade volumes. Kansas City Fed President Esther George is set to speak at 7 p.m. Eastern Time Wednesday.
An auction of $41 billion in 5-year Treasury notes TMUBMUSD05Y, -2.13% were completed — a part of a sale of more than $100 billion in Treasurys set for sale this week — but didn’t significantly influence Treasury trading on the session.