June’s stellar jobs report eased worries about the U.S. economy, helping stocks move north. But, demand for bonds continues to increase pushing their price higher and dragging yields to record lows. Traditionally, stocks and bonds move in opposite direction as stocks are considered risky assets, while bonds are safe-haven bets.
So, why are investors latching on to bonds despite the encouraging jobs report? That’s simply because investors are still concerned about the impact Brexit will have on Britain’s economy. Global growth is also expected to slow down, creating fresh bouts of volatility in the financial markets. As bond yields decline, income seeking investors look for funds that are exposed to stocks providing juicy dividends. A low interest rate environment is also a boon for dividend paying companies.
U.S. Bond Yields Closed at Fresh Lows
It seems long-term bonds are out of sync with the economy. Despite the strongest employment report in eight years, which confirmed that economic expansion is still intact, safe havens such as bonds were still bought. Payrolls in the U.S. grew by 287,000 last month, way above analysts’ expectations, dispelling fears that the U.S. economy was headed for a recession.
Bond prices increased due to higher demand, but their yields plunged. According to Tradeweb, the 10-year Treasury note settled at 1.366% on Friday, slightly below its previous record close of 1.367% set on Tuesday. The 30-year Treasury yield closed at its lowest ever level of 2.110% on Friday (read:Â What is a Bond Yield?).
Like the Treasury yields, term premiums too have fallen considerably in recent times. The term premium is down to a record low of 0.71 percentage points. Term premiums are the excess yield that investors demand for holding a long-term bond instead of a series of shorter-term bonds (read: What We Do and Don’t Know about the Term Premium).
Free Fall in Yields Across the Globe
Investors in Europe and Japan continue to pile into government debt, dragging down yields. According to Bank of America Corporation, about $276 billion of euro-denominated corporate bonds are trading at a negative yield. Italy has around $1.6 trillion worth of negative-yielding sovereign debt. The yield on Germany’s 10-year bund slipped less than 1 basis point to a negative 0.17% on Friday, while U.K.’s 10-year gilt yield was also down less than 1 basis point to 0.77%, according to Tradeweb (read: German, U.K. bond yields fall closer to record lows).
