U.S. 10-Year Treasury Yield Settles at Record Low
The yield on the benchmark U.S. 10-year Treasury note closed Tuesday below 1.4% for the first time on record, the latest milestone of the record-setting declines in global government bond yields following the U.K.'s vote in late June to quit the European Union.
Benchmark 10-year government debt yields from the U.S., Germany, Switzerland, France, Denmark and Sweden all fell to fresh historic lows on Tuesday as persistent uncertainty surrounding the economic and political fallout from the U.K.'s vote to quit the European Union continues to boost demand for haven assets.
The U.S. 10-year Treasury yield settled at a record low of 1.367%, compared with 1.446% Friday. The U.S. bond market was shut Monday for the Independence Day holiday. The previous closing low was 1.404% in July 2012.
Compounding markets' anxiety on Tuesday is concerns over the health of the banking system in Italy. Shares of Italian banks have been hard hit lately as investors fret about their bad loans.
The buying sent the yield on the benchmark U.S. Treasury note to as low as 1.370% earlier Tuesday, surpassing the previous historical low of 1.385% set on Friday, according to Tradeweb. The 10-year government bond yields in Germany and Switzerland fell further below zero and the 10-year yield in Denmark fell to near zero. Yields fall as bond prices rise.
It was the latest milestone for the government bond markets in the developed world that have been plunging in 2016. Lower yields reflect a lack of confidence over the global economy that has been running at a sluggish pace due to soft global demand for goods, stagnant wages and aging populations.
In the meantime, ultraloose monetary stimulus by major central banks have been less effective to boost growth or battle low inflation, and investors are worried that negative-interest-rate policies in Japan and Europe are hurting banks' profit margins, distorting market signals and leaving bond investors exposed to large and growing interest-rate risks by piling into long-term government bonds.
"The global economy is vulnerable to shocks," said Jae Yoon, chief investment officer at New York Life Investment Management, which had $286 billion assets under management at the end of May. "There is lot of uncertainty regarding Brexit."
Traders say the 10-year Treasury yield still has room to fall. Investors and analysts say bond yields are in uncharted waters now and that it is hard to predict how low yields could go in this environment.
Few in the financial markets have foreseen a period of negative interest rates touching off globally. The total of sovereign debt with negative yields jumped to $11.7 trillion as of June 27, up $1.3 trillion from the end of May, according to Fitch Ratings.
The pool is likely to expand further in the months ahead due to ongoing purchases of government bonds by the European Central Bank and the Bank of Japan.
U.S. Treasury debt has been feeling the gravitational pull over the past two years. Struggling to get income in Japan and Europe, investors have piled into Treasury bonds, which offer much more attractive yields.
The 30-year Treasury bond has been the market darling, and the buying spree has pushed down its yield to record lows lately. The 30-year bond's yield closed at a record low of 2.138%.
The 30-year bond was usually the playground for pension funds and insurance firms. But it is now being bid up by a broader investor base due to the global hunger for income. Analysts say it wouldn't surprise them if the 30-year yield falls below the 2% mark in the weeks ahead.
Lower government bond yields also reflect growing expectations that major central banks would take fresh actions. Brexit is darkening the global growth outlook and making it more difficult for central banks in the U.S., Japan and Europe to push up inflation to their targets.
The Bank of England Governor Mark Carney said Thursday that growth will slow in coming months and that further interest-rate cuts and other measures will be needed. Many now expect the Bank of Japan to ease monetary policy further at its July meeting and for the European Central Bank to extend its bond-buying program later this year.
Investors also expect that the Federal Reserve is likely to hold off in raising interest rates this year.
"A lot of what is driving core government bond yields lower is expectations of massive monetary stimulus and more" quantitative easing, said Mike Riddell, a portfolio manager at Allianz Global Investors, referring to the bond-buying programs of central banks in Europe and Japan.
Mr. Riddell said he has been investing in haven government bonds and taking riskier positions by buying corporate debt and the Mexican peso.
Skinny government bond yields mean investors face diminished returns from the bond market. Even just a moderate rise in yields will wipe out the slim income earned from bonds. Investors are particularly vulnerable to potentially large losses by piling into long-term government debt as their prices will post a sharper drop than short-term debt in response to a given rise in yields.
Goldman Sachs Group Inc. warned in a report earlier in June that a 1 percentage point "upward shock to interest rates would translate into over $1 trillion in capital losses" to investors holding U.S. Treasury and other fixed-income debt.
Write to Min Zeng at min.zeng@wsj.com and Christopher Whittall at christopher.whittall@wsj.com