The yield on the benchmark 10-year Treasury note dipped below 1.5% for the first time in a month, dragged down in recent sessions by tepid economic data and high demand from investors both in the U.S. and elsewhere.
The yield on the 10-year Treasury note, which helps set borrowing costs on everything from corporate debt to mortgages, fell near 1.47% before recovering to trade at a recent 1.501%, according to Tradeweb. That is down from 1.527% Tuesday and the first intraday fall below 1.5% since May 7.
The move extends a recent drift lower that began Friday after jobs data showed a less robust labor-market recovery than expected. That eased investors’ worries that hefty hiring and wage gains would spur inflation, forcing the Federal Reserve to start withdrawing easy-money policies sooner than expected.
Bond yields tend to rise when investors are expecting growth and inflation, which can spur the Fed to raise interest rates, and fall when the outlook darkens.
“Bond market participants looking for a market changing narrative are likely disappointed by the May jobs report,” said JPMorgan Chase & Co. interest-rate strategists in a note to clients. “It’s not that the numbers were bad, indeed they were good…but not good enough.”
Mixed signals around the U.S. economic recovery left the 10-year yield trading in a range around 1.6% for months, ending an early-year climb spurred by investors’ bets that a stimulus-powered recovery would fuel inflation. A key measure of investors’ expectations for average annual inflation over the next 10 years, known as the 10-year break-even rate, slipped last week.
Analysts said other factors are driving lower yields, including a weaker dollar, which has lifted demand for Treasurys from foreign investors. Foreign investors tend to hold more Treasurys when the dollar declines and reduces the costs of protecting against swings in currencies.
That decline has been enough to make Treasury yields attractive on a relative basis for investors in Europe and Japan, according to a recent report by NatWest Markets. Japanese investors have added about $19 billion in Treasurys this year through March, the last month for which data are available.
Federal Reserve holdings of U.S. securities on behalf of foreign central banks has increased by $40 billion, according to NatWest.
Hedge funds that shift stock and bondholdings based on volatility in markets are snapping up Treasurys. John Briggs, head of strategy for Americas at NatWest, said so-called risk parity funds, which seek to produce market-beating gains with lower risk by using futures or other derivatives to increase their returns on safer assets such as bonds, have also moved money from stocks into bonds in recent weeks.
“Fixed income allocations currently stand at 75.6%, the largest since November of 2020,” Mr. Briggs said in an email. “With the overall fixed income allocation rising, this suggests additional demand for U.S. Treasurys.”
a U.S. rates strategist at TD Securities, said some investors who were short bonds have cut their positions ahead of Thursday’s monthly inflation report and next week’s Fed meeting, also fueling the drop in yields.
“Combined with a break of the 1.50% level in the 10-year, this may be pushing rates lower disproportionately,” said Mr. Goldberg.
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