MW: Treasury yields edge lower as Draghi sparks European bond rally
U.S. Treasury yields edged lower Thursday, taking a cue from a sharp drop in government bond yields in the eurozone after European Central Bank chief Mario Draghi hinted more monetary stimulus is likely next month.
The ECB left interest rates unchanged Thursday morning, but Draghi said the central bank will re-examine the degree of stimulus it’s providing in December, by potentially adjusting its size, composition and duration.
Draghi’s dovish remarks sparked a rally in European government bond markets, which pushed prices higher and drove yields toward five-month lows. The Treasury market followed suit, with yields declining about two basis points. Meanwhile, Draghi’s hints at further stimulus took a toll on the euro, which fell to its lowest level in two weeks versus the dollar.
The yield on the benchmark 10-year German bond TMBMKDE-10Y, -11.11% known as the bund, tumbled five basis points to 0.522%, its lowest level since Oct. 2. One basis point is equal to one hundredth of a percentage point. Bond yields fall when prices rise, and vice versa.
Meanwhile, German bund yields turned negative in all maturities up to six years, with the 6-year bund yield dropping 5.4 basis points to negative 0.012%.
A further drop in eurozone rates would likely pull down Treasury yields, as the spread or yield differential between Treasurys and bunds would make U.S. government debt an attractive investment, said Tony Roth, chief investment officer at Wilmington Trust.
But the decline in U.S. rates would likely be limited by rising interest-rate hike expectations by the U.S. Federal Reserve, Roth added.
Indeed, later on Thursday, Treasury yields rose following news that existing home sales rose to the second-highest monthly level since Feb. 2007. Also, the Labor Department said that the four-week average of the people who applied for initial unemployment benefits fell to its lowest level in four decades.
The strong data from the housing and labor markets were taken as an indication that the Fed might be closer to raising interest rates in the next few months.
The yield on the 10-year Treasury TMUBMUSD10Y, -0.09% inched 0.2 basis point lower to 2.028%, according to Tradeweb.
The yield on the 30-year bond TMUBMUSD30Y, +0.01% gained 0.3 basis point to 2.872% and, among shorter maturities, the yield on the two-year Treasury note TMUBMUSD02Y, -3.90% lost 2.8 basis points to 0.597%.
