Worries about the spread of Covid-19 variants drove U.S. government bond yields to their lowest levels in months on Monday, the latest drag on investors’ expectations for economic growth and inflation.
The yield on the benchmark 10-year Treasury note posted its biggest one-day decline since March, sliding to 1.181% from 1.300% at Friday’s close, according to Tradeweb. That is the lowest close since Feb. 11. Yields fall when bond prices rise.
The WSJ Dollar Index, which measures the dollar against a basket of 16 foreign currencies, climbed 0.3% to its highest level since March.
“This feels like a risk-off move on virus concerns. It takes some of the shine off growth over the next couple of quarters,” said Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.
The spread of Covid-19 variants is prompting concerns about widespread tightening of restrictions on movement and commerce, investors said. On Monday, the Australian government extended a lockdown in Melbourne and tightened rules for Sydney over the weekend. Infection cases have also recently reached new highs in Indonesia and Vietnam, according to data from Johns Hopkins University.
The U.K. reopened its economy on Monday, despite a recent uptick in Delta variant cases. Both Prime Minister
and the British Treasury chief are in self-isolation after being exposed to Covid-19.
“The market is starting to look more closely at what is going on in the rest of the world, and I think that has made a lot of investors more nervous,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.
U.S. government bonds are typically bought by investors for safety and liquidity during bouts of market stress. The dollar is also considered to be a haven asset. The greenback strengthened Monday against the euro, the British pound and most emerging-market currencies, which are often treated by investors as proxies for risk taking.
Monday’s move in the bond market represented only the latest leg down in yields, which have been sliding for months as investors have become increasingly skeptical about the optimistic forecasts for economic growth and inflation that were the near-consensus earlier in the year.
Worries about the Delta variant and a slower-than-expected rebound in the labor market have helped damp investors’ enthusiasm, while higher-than-expected inflation data has only increased concerns that the Federal Reserve might tighten monetary policy sooner than the economy can handle it.
Often, higher inflation causes bond yields to rise because it reduces the value of interest payments and can lead the Fed to raise short-term interest rates. In this case, however, many investors think consumer price increases are due to one-off factors related to the reopening of the economy, and market-based measures of longer-term inflation expectations have declined in recent months.
Earlier this month, the Labor Department reported that consumer prices rose 0.9% in June from May. That’s 5.4% above their level a year earlier—the biggest year-over-year gain since 2008. Federal Reserve officials have maintained the stance that high inflation isn’t expected to last very long.
A survey on consumer confidence from the University of Michigan last week showed that Americans are responding to the rise in prices by avoiding big purchases, expecting cheaper prices in the future.
“This is the opposite of what one would expect if the environment was genuinely inflationary,” said
global head of foreign-exchange research at
“It shows the global economy has a very low speed limit and consumers remain very price-sensitive.”
The summer months also typically bring a period of lower bond issuance and the smaller supply coupled with continued high levels of central bank purchases is also likely to be weighing on bond yields, investors said.
“There is a bit of a supply drought, due to where we are in the year from a seasonal perspective,” said
a bonds portfolio manager at Janus Henderson.
Longer-dated Treasury yields also declined during Monday’s session. The 30-year Treasury yield fell to 1.816%—its lowest close since Jan. 27—from 1.931% Friday.
Some analysts say that the decline in Treasury yields may be amplified by investors closing out bets that yields would rise.
“The market last week was still relatively short Treasurys,” said Mr. Goldberg. “Yields had not moved enough to wipe out the whole short position, so that could be something that is accelerating [Monday’s] declines.”
—Sebastian Pellejero and Sam Goldfarb contributed to this article.
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