Update July 12. The yield on 10-year Treasuries rose to 1.52%, the highest level this month (and prices fell). Last week the yield on the 10-year Treasury hit a record low of 1.318%.
The climb in Treasury yields is likely to be temporary, in my opinion. The market is coping with a series of big auctions this week. An auction of three-year Treasuries on Monday attracted the weakest demand in seven year. Today an auction of $20 billion in U.S. Treasuries was the weakest demand since 2009.
The trend toward higher yields and lower bond prices isn’t limited to the United States. The yield on German 10-year bunds rose by 8 basis points to a negative 0.9%. Yields on the French 10-year bond climbed 7 basis points to 0.19%.
And the bond market faces intense competition for cash from a continued rally in U.S. stocks that had taken the Standard & Poor’s 500 stock index to 2154.70, a new all-time record, as of 3 p.m. New York time. The Dow Jones Industrial Average also hit a new all-time high today. When the S&P 500 is climbing 0.82% in a day, the argument for buying 10-year Treasuries yielding 1.52% gets a little weaker.
But the dynamics driving Treasury yields lower (and prices higher) in the longer term remain in place. At 1.52% for a Treasury and a negative 0.9% for a German bund, U.S.bonds have an immense relative yield advantage that’s likely to keep cash flowing into the U.S. bonds. And yields in Europe seem set to go lower. Deutsche Bahn today become the first non-financial company to sell a bond in euros with a negative yield. More than $3.3 trillion in European sovereign debt trades now with a yield below 0%.
Inflation expectations continue to fall. By the Federal Reserve’s preferred measure, inflation is now rising at just 0.9% annually. The bond market is now trading with expectations for just a 1.3% inflation rate in 2021-2026, according to Bloomberg. That’s the lowest level of implied 5-year inflation in Bloomberg data that stretches back to 1999.