Treasury bond exchange traded funds (ETFs) have outperformed this year, with Treasuries enjoying their best start to a year in over a decade.
Momentum could be sustained as lingering concerns over the “Brexit” vote pushes investors toward safe-haven assets and the Federal Reserve will likely delay interest rate normalization in light of the uncertainty.
U.S. government bonds have rallied this year after heightened volatility and global economic weakness pressured the equities market, renewing the safety play at the start of the year.
Now, with the United Kingdom set to sever ties with the European Union, the safe-haven theme may be extended. In a knee-jerk reaction to the global sell-off following the Brexit tally, investors piled into the safety of U.S. Treasuries to preserve capital, pushing yields toward record lows – yields on benchmark 10-year Treasury notes plunged to 1.419% early Friday, just shy of its record low of 1404% in July 2012.
Along with the uncertainty over the Brexit fallout, the U.S. Treasury market may find further support from the Fed as we will likely extend the low-rate environment. U.S.-interest rate futures traders even began to price in a less than 5% probability that the Fed could lower interest rates when it next meets on July 26, 27. Many don’t expect the central bank to hike interest rates until 2017 as the Brexit vote could weigh on U.S. and global growth.[related_stories]
Moreover, global central banks could expand their loose monetary policies and shore up liquidity in markets to support their respective economies in the wake of the Brexit fallout, which would keep pressure on overseas yields and potentially send foreign investors into relatively more attractive yield-generating assets like U.S. Treasury bonds. Both the Bank of England and the European Central Bank promised to take action to assuage the markets.