By Sunny Oh
U.S. Treasury yields fell Friday, capping a weekly slump for government debt, amid setbacks to plans to reopen businesses from coronavirus lockdowns, with Texas and Florida rolling back some measures on Friday, undermining confidence in the shape of the U.S.’s economic recovery and bolstering demand for assets perceived as havens.
What are Treasurys doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +6.20% fell 3.8 basis points to a low of 0.636%, extending the weekly drop to 6 basis points. Based on 3 p.m. Eastern Time levels, the note touched its lowest level since May 14, according to Dow Jones Market Data.
The 2-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +2.68% fell 1.8 basis points to 0.166%, marking its lowest level since June 2. The 2-year and 10-year notes have fallen for three consecutive weeks.
Meanwhile, the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +3.68% fell 4.5 basis points to 1.372%, marking its lowest point since May 15, contributing to a 9.7 basis point decline for the week.
What’s driving Treasurys?
Safe-haven inflows into the bond-market helped to pin Treasury yields to the low end of their trading range as the market grappled with record rises in new U.S. COVID-19 cases concentrated across in southern and western states, with some governors halting business reopening plans. Texas and Florida both ordered the closure of bars on Friday, raising doubts over investors’ assumption that state and local governments wouldn’t reinstate lockdown measures.
Assets considered risky took a hit on Friday, despite the unprecedented level of support for the economy from fiscal and monetary policy makers. The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.33% closed 2.4% lower, contributing to a 2.8% drop for the week.
In U.S. economic data, consumer spending climbed in May to a record 8.2% after tumbling in April, however, personal incomes sank 4.2% last month. Meanwhile, the final update of the consumer-sentiment survey in June slipped to 78.1 from an initial 78.9, the University of Michigan said Friday.
But analysts say official data releases are backward-looking, and many investors are looking more closely at real-time data. Those include visits to retail and restaurants, which can help gauge if the re-acceleration of COVID-19 cases will weigh on economic activity.
The Federal Reserve’s balance sheet declined by $12.4 billion to $7.08 trillion as of June. 24, compared with the week prior. While the central bank’s holdings of government bonds and mortgage-backed debt increased by more than $52.8 billion over that period, the growth was offset by a sharp drop in usage of the Fed’s dollar liquidity swaps.
What did market participants’ say?
“We are not the only people who have been surprised at how fast the market has recovered relative to the economic impact. This [selloff in risk assets] definitely makes sense,” said Lindsay Bernum, global macro analyst at Smith Capital Investors, in an interview.
“We believe this May and June we’ll see a dramatic increase in activity, then plateau. By then, we’ll have a new normal of lower output and higher debt levels.”