Yield Plunge Stirs Thoughts of 1% Treasuries on Delta Variant

Long-term Treasury rates tumbled to the lowest levels in months on Monday as the spread of the delta coronavirus variant called into question optimistic assumptions about economic recovery, also touching off a global stock market slump.

Market-implied expectations for a Federal Reserve rate increase were pushed further into the future amid stronger-than-normal debt-market volumes, and the rally in bonds drove benchmark 10-year yields down as much as 12 basis points to 1.17% on Monday. That’s a level unseen since early February and well below the 14-month high of 1.77% it reached in March. Some traders are now likely to begin looking toward 1%, a mark that hasn’t been breached since late January.

The resurgence of virus cases despite widespread vaccination induced investors to dial back risk-taking, anticipating a fresh wave of restrictions on economic activity. The 10-year rate ended below its 200-day moving average for the first time since November, while the 30-year yield also hit a five-month nadir and the gap between two- and 10-year yields narrowed to less than 100 basis points for the first time since February.

The latest wave of demand for Treasuries is based on “the forward-looking reemergence of Covid risks coupled with both fiscal and monetary policy that can’t step up as aggressively,” said Stefan Dannibale, head of U.S. Treasury trading and sales at StoneX Group Inc. “The market is looking at those challenges and re-rating growth lower ahead.”

The move started in Asia with rising cases fueling speculation that a lockdown in Sydney could be extended, providing a lift for domestic bonds. Moves unfolded further in European trading hours, before gathering pace when the U.S. session day began, accompanied by heavy volume in Treasury futures. By 3 p.m. in New York, volume in the 10-year note contract was near 2 million, compared with a daily average of 1.55 million over the past 30 days. Bonds were little changed during the Asian session on Tuesday.

“Even if we do get through this latest growth scare for well vaccination countries, going forward it will still be a different story for non-vaccination countries, so even if in vaccinated nations the concerns pass, in others it will not,” NatWest Markets’ global head of desk strategy John Briggs wrote in a client note.