(Bloomberg) -- A global rush to buy sovereign debt kept on going in Treasuries Monday, with bond traders increasing wagers that the Federal Reserve will have to cut interest rates later this year.
Treasury 10-year yields fell as low as 2.3754 percent on Monday, touching the lowest level since December 2017 and moving toward the biggest two-day slide since January. The push lower came amid a continued repricing of the Fed’s policy outlook, with overnight index swaps showing that 25 basis points worth of easing are expected by the central bank’s October meeting.
Investors scrambling to cover bets against Treasuries may be behind Monday’s move, according to BMO Capital Markets strategist Jon Hill.
“The price action itself is the story,” Hill said. “It’s a combination of stops and capitulation of the remaining short base in the front end.”
The 10-year yield has also fallen below the effective fed funds rate -- the overnight benchmark targeted by the U.S. central bank, which currently stands around 2.41 percent. The market is now indicating around 8 basis points of cuts priced into the Fed’s June meeting, and a full quarter-point cut by the end of this year, based on overnight index swaps.
The yield spread between 3-month and 10-year securities, often used as an indicator of recession risk, last week flipped for the first time in more than a decade and Monday’s price moves drove it even further below zero.
Positioning was one of the driving forces behind Friday’s rally, which saw Treasuries grind higher across the curve after weak German manufacturing data reignited global growth concerns.
“There is nothing driving the markets today news-wise other than inertia,” said Neil Dutta, head of economics at Renaissance Macro Research. “The market is reacting to itself.”
