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July 19, 2021, 3:55 p.m. EDT

10-year Treasury yield slides to 5-month low, touches 1.179% as delta spread spooks market

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By Vivien Lou Chen and William Watts

Treasurys extended their rally Monday, driving the yield on the 10-year note below 1.18% to a five-month low, as investors worried about the spread of the delta variant of the coronavirus that causes COVID-19 sought safety in bonds.

How Treasurys are performing

  • The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.26% slumped almost 12 basis points to 1.181%, trading at its lowest since Feb. 11 based on 3 p.m. EST levels, according to Dow Jones Market Data. That is also below its 200-day moving average at 1.257%, according to FactSet.

  • The 2-year Treasury note yield a /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +3.83% was down 1.6 basis points at 0.210%.

  • The 30-year Treasury bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.31% dropped 11.5 basis points to 1.816%.

Yields fell last week . The 10-year yield fell 5.4 basis points, while the 30-year Treasury was off 5 basis points, representing a third consecutive yield slide for the durations. The 2-year, however, posted a weekly climb of 1.1 basis points, marking its largest weekly gain since the period ended June 25, according to data compiled by Dow Jones Market Data.

What’s driving the market?

Global equity markets and other assets viewed as risky were under pressure Monday, with much of the blame attributed to jitters around the rate of infection of the delta variant, driving investors to seek safety in Treasurys and other so-called core government debt, such as German bunds, analysts said.

Treasury yields have retreated significantly after nearing 1.80% in March on expectations for a surge in growth and inflation as the economy reopens. The so-called reflation trade, however, has seen an unwinding, which has accelerated as concerns about the spread of the delta variant have raised doubts about the pace of the recovery in the months ahead.

The scope of the fall in yields, however, has also sparked debate, with investors questioning whether investors have grown too complacent about inflation risks.

Read: Does the bond market have it wrong about inflation?

What are traders and analysts saying?

“Uncertainty on the impact of new corona outbreaks causes investors to continue to err to the cautious side. Core bonds remain well bid,” wrote analysts at KBC Bank, in a note.

“From a technical point of view, the U.S. 10-year yield declining below 1.25% and German 10-year yield /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y +1.51% giving up -0.38% would flash further red lights on the reflationary narrative,” they said.

Gang Hu, a managing partner and TIPS trader at WinShore Capital Partners, says the once-popular reflation trade is already giving way to an entirely different trade as investors begin to factor in both slower-than-expected U.S. growth, along with the prospects of a prolonged period of higher inflation readings.What he calls “the tapering trade”—in which investors sell stocks and commodities, while buying long-end Treasurys — has the potential to drive the 10-year rate to as low as 1% within the next two months, he says. “The unanchoring of inflation expectations is happening now, putting the Fed in a tough position,” Hu said via phone Monday. The Fed’s job is to cut off any wage-price spiral “before inflation goes berserk,” he says. “But it hasn’t done that yet, and the whole thing could unravel very quickly, with the risk that the central bank will need to turn hawkish,” Hu said.

add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
+0.0034 +0.26%
Volume: 0.00
Sept. 22, 2021 12:37a
add Add to watchlist BX:TMUBMUSD02Y
BX : Tullett Prebon
+0.0082 +3.83%
Volume: 0.00
Sept. 22, 2021 12:34a
add Add to watchlist BX:TMUBMUSD30Y
BX : Tullett Prebon
+0.0057 +0.31%
Volume: 0.00
Sept. 22, 2021 12:34a
add Add to watchlist BX:TMBMKDE-10Y
BX : Tullett Prebon
+0.0048 +1.51%
Volume: 0.00
Sept. 21, 2021 6:02p

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