Treasury investors are in no mood to turn their backs on U.S. debt as the government prepares to unleash another $20 billion of new supply of 10-year notes.
With yields on the securities less than three basis points from a two-month low, pre-auction trading of the debt on offer Wednesday signals they will be sold at a yield close to what was achieved in last month, which was the lowest in more than three years. The term premium last week dropped to levels that imply the highest demand in at least half a century.
A weaker-than-expected U.S. jobs report for May last week and concern that the U.K.'s June 23 referendum on the nation's European Union membership will unleash market turmoil globally have driven demand for safety. Treasuries also have appeal because U.S. yields are relatively high compared with those in markets such as Japan and Switzerland that have have negative yields for a decade and longer. German 10-year bund yields are approaching zero, a milestone that Commerzbank AG said could be breached as soon as this week.
“Given the weak payrolls and that Fed hikes are probably not going to come this summer — maybe in September but at least for the next couple of months it seems less likely — that's clearly supporting demand for bonds,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “I would also expect the auction to show that.”
Benchmark Treasury 10-year note yields were little changed at 1.72% as of 8:02 a.m. in New York, according to Bloomberg Bond Trader data. The yield dropped to 1.695% on June 3, the lowest since April 7.
The price of the 1.625% security maturing in May 2026 was 99 5/32.
For more on the falling Treasury market term premium, click here.
The U.S. sold $24 billion of three-year notes Tuesday and plans to auction $12 billion of 30-year bonds Thursday.
The May 2026 securities scheduled to be sold Wednesday yielded 1.725% in pre-auction trading, compared with 1.71 percent at a previous sale of 10-year bonds on May 11, which was the least since December 2012.
The term premium dropped to negative 0.47 percentage point at the end of last week, the lowest level since 1962, according to the Federal Reserve Bank of New York. A negative reading indicates investors are willing to accept yields below what's considered fair value.
Germany's 10-year bund yield declined to a record 0.033% on Wednesday, while that on the Bloomberg Global Developed Sovereign Bond Index dropped to 0.619% a day earlier, the lowest level in data going back to 2010.
The futures market implies an 18% probability of a rate increase by July, according to data compiled by Bloomberg. A day before the May jobs report, traders assigned a 55% probability.
Treasuries also benefit from the liquidity of the world's biggest bond market, said Kazuaki Oh'E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. “Demand will probably not be too bad.”