10-year Treasury yield falls on deteriorating risk sentiment

10-year Treasury yield falls on deteriorating risk sentiment
Written by:
Michael Harris
28th October, 14:53
  • U.S. Treasury yields are headed lower today on increased risks related to the spikes in new coronavirus cases
  • A trend of narrowing the yield gap between Japan and the rest of the globe is observed
  • The 10-year yield has fallen from 0.872% to 0.746% in the past few days

The yield on the 10-year Treasury bond has continued to contract after slipping to 0.758% today. In the meantime, it seems that Japanese life insurance companies are coming back to the domestic bond market as yield gaps between them and foreign rivals narrow as a result of the coronavirus pandemic.

Fundamental analysis: The pandemic sends shares and yields lower

U.S. Treasury yields are headed lower today on increased risks related to the spikes in new coronavirus cases.

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“Treasuries bull flattened further overnight as global risk assets came under pressure on renewed lockdown momentum in Europe,” Ian Lyngen, BMO’s head of U.S. rates, said in a note Wednesday. 

“The implications from a resurgence of the pandemic as winter approaches will guide domestic equities in the medium term.”

Elsewhere, the Japanese life insurers are intending to include more domestic fixed-income assets in their portfolios while attempting to drop those of external debt in the second half of this fiscal year through March, said officials.  

“We have long been investing primarily in U.S. dollar bonds but now that their yields have fallen to so low, we are not in a position to buy them aggressively anymore,” said Koichi Nakano, general manager for investment planning at Meiji Yasuda Life, a Tokyo-based life insurance company.

Institutional investors in Japan have relied on foreign bonds as a main source of income for years, due to lack of domestic interest income given the ultra-easy monetary policy managed by the Bank of Japan.

However, following the Covid-19 outbreak and extraordinary stimulus packages brought by central banks around the world to help economies recover have flattened bond yields in the U.S. and other countries, narrowing the yield gaps between Japan and the rest of the globe.

Technical analysis: Approaching 200-DMA

The 10-year U.S. Treasury yield has remained in its 0.5-0.8% range after plummeting to a historical low of 0.318% following the coronavirus outbreak in March. A number of investors are concerned about owning foreign bond assets without using currency as a hedge as they predict the USD/JPY pair to decline given the dollar’s sharp drop in the middle of 2020. 

U.S. 10-year yield (TradingView)

However, using hedges can limit gains from U.S. bonds. The 10-year yield has fallen from 0.872% to 0.746% in the past few days approaching nearby support at 0.72%.

Summary

The 10-year U.S. Treasury yield has continued to trend lower today on heightened risks globally as the number of new COVID-19 cases rises.

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