Treasury bond exchange traded funds maintained their momentum, with benchmark yields on 10-year notes dipping to a new record low on Friday, as investors feared Brexit would weigh on global growth and cause the Federal Reserve to push off interest rate hikes.
On Friday, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) rose 0.3% and iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) gained 1.4%. Both funds are trading at their all-time highs.
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Meanwhile, yields on benchmark 10-year notes dipped to 1.456% and yields on 30-year Treasuries fell to 2.241%. The yield on 10-years was also briefly trading at 1.385% in early European trading hours, eclipsing its prior record low in 2012, reports Ben Eisen for the Wall Street Journal.
Treasury bond prices found support from short-sellers trying to cover their trades and a surge in demand after some second guessing over the European Central Bank’s bond purchasing program.
Traders heavily shorted U.S. Treasuries Thursday to close out positions as the quarter ended and set up for the U.S. long weekend, according to according to Jim Vogel, an interest-rate strategist at FTN Financial.
[related_stories]After the close Thursday, rumors of the ECB considering a change to its bond program that would benefit peripheral debt began circulating, which sparked a rush out of high-grade sovereigns and into peripheral debt. However, news reports suggested that the ECB was not actually considering a change caused flows to reverse back into high-grade debt, which pulled down yields and created overflow demand into U.S. Treasuries.
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“During an extreme fast-moving market during European trading hours, in a move to a safe-haven asset class, Treasurys often get a big echo trade,” Vogel told the WSJ.
The low yields in overseas markets have also helped support U.S. Treasuries as an attractive alternative source of yield for foreign investors. According to Fitch Ratings, a record $11.7 trillion of global sovereign debt has now entered sub-zero territory, reports Adam Samson for the Financial Times.
Looking ahead, some of the world’s biggest investors, including BlackRock, Guggenheim Partners and Vanguard Group, argued that the Brexit results could mean subdued growth and lower yields for years to come, reports Brian Chappatta for Bloomberg.
“The reason is simple: if you’re facing negative interest rates on over 30 percent of government debt, you’re going to go look for where you can get positive rates,” Mohamed El-Erian, the chief economic adviser at Allianz SE, told Bloomberg. U.S. 10-year yields “can go to 1.25 percent quite easily if we continue to see this combination of more central bank activism and a slowdown in Europe.”
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iShares 20+ Year Treasury Bond ETF