Treasury yields dropped and the dollar rallied as the spread of Covid-19 variants weighed on investors’ expectations for economic growth and inflation.
The benchmark 10-year U.S. government bond yield fell to 1.213%, the lowest since February, on Monday. Yields fall when prices rise. The WSJ Dollar Index climbed 0.3% to the highest level since March earlier in the day, before flattening.
“This feels like a risk-off move on virus concerns. It takes some of the shine off growth over the next couple of quarters,” said Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.
The spread of Covid-19 variants is prompting concerns about widespread tightening of restrictions on movement and commerce, investors said. On Monday, the Australian government extended a lockdown in Melbourne and tightened rules for Sydney over the weekend. Infection cases have also recently reached new highs in Indonesia and Vietnam, according to data from Johns Hopkins University.
The U.K. reopened its economy on Monday, despite a recent uptick in Delta variant cases. Both Prime Minister
and the British Treasury chief are in self-isolation after being exposed to Covid-19.
U.S. government bonds are typically bought by investors for safety and liquidity during bouts of market stress. The dollar is also considered to be a haven asset. The greenback strengthened Monday against the euro, the British pound and most emerging market currencies, which are often treated by investors as proxies for risk taking.
A survey on consumer confidence from the University of Michigan last week showed that Americans are responding to the rise in prices by avoiding big purchases, expecting cheaper prices in the future.
“This is the opposite of what one would expect if the environment was genuinely inflationary,” said
global head of foreign-exchange research at
“It shows the global economy has a very low speed limit and consumers remain very price-sensitive.”
The summer months also typically bring a period of lower bond issuance and the smaller supply coupled with continued high levels of central bank purchases is also likely to be weighing on bond yields, investors said.
“There is a bit of a supply drought, due to where we are in the year from a seasonal perspective,” said
a bonds portfolio manager at Janus Henderson. “The summer’s going to see less bodies on the desk and therefore you can get choppy price action.”
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