Treasury bonds and related exchange traded funds have been on a tear as the yield on benchmark 10-year Treasury note dropped to its lowest level ever Wednesday.
Year-to-date, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) rose 8.6% and iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) gained 19.4%. Both funds are trading near their all-time highs.
Related: Treasury ETFs Climb as Yields Hit Record Lows
The Treasury market has strengthened, with yields on benchmark 10-year notes hovering around 1.38% after trading as low as 1.321% Wednesday. Bond prices and yields have an inverse relationship, so falling yields correspond with rising prices.
Now, fixed-income observers are eyeing the 1% mark as further volatility could potentially push yields even lower and help support an extended bond rally.
“If the global and U.S. [economies are]pulled down by Brexit, then yields have room to fall, and potentially we could see 10-year U.S. yields below 1%,” Jae Yoon, chief investment officer at New York Life Investment Management, told the Wall Street Journal.
[related_stories]Alternatively, Yoon believes yield could climb back above 2% if the United Kingdom and the European Union make “an amicable divorce,” work out trade issues and assuage market fears.
Minutes from the June meeting also showed that the Federal Reserve is divided over the economic outlook and how to proceed on interest rate decisions, the Wall Street Journal reported. Fed officials were uncertain of the health of the labor market, outlook for growth, risks to the economy and the inflation outlook.
Fed officials agreed it was “prudent to wait” for additional economic data before proceeding.
Investors now don’t expect the Fed to hike rates at the July meeting in the wake of weak employment data and Britain’s decision to withdraw from the European Union. Consequently, without the Fed to back higher rates, Treasuries have more leeway to push higher and yields fall lower.
Related: 12 Treasury Bond ETFs with Thrust as Brexit Uncertainty Extends
Moreover, U.S. fixed-income market may find further support from overseas demand, especially with international bonds offering paltry yields. For instance, Japanese 20-year notes and the Danish 10-year bonds saw their yields go negative for the first time Wednesday.
For more information on the Treasuries market, visit our Treasury bonds category.
iShares 7-10 Year Treasury Bond ETF