TREASURIES-U.S. Treasury yields drop further, 10-year at 1.33%
U.S. Treasuries extended their rally on Wednesday, with 10-year yields dropping to a new 4-1/2-month low as doubts crept in about the strength of the global economic recovery and the possibility of a COVID-19 resurgence.
Ten-year yields fell another four basis points to as low as 1.33%, a day after tumbling 8 basis points in their biggest one-day slide since February.
Tuesday's sudden price rally baffled many market players, though some pointed to risks to growth stemming from the infectious new COVID-19 variant, with many countries across Asia and Europe reporting higher infection case loads.
Others noted that economic data has underwhelmed in recent days. The U.S. services sector, which accounts for about two-thirds of economic activity, expanded only moderately in June, after record May growth, the U.S. Institute for Supply Management reported on Tuesday.
Similarly, Germany's ZEW economic research institute reported a sharp drop in investor sentiment and separate data on Wednesday showed orders for German-made goods slumped in May, hurt by weaker demand from countries outside the euro zone. German 10-year yields slipped to three-week lows.
"There is a sense of 'what goes up must come down', and that's not yields but the economic indicators, which have levelled off for some time already," said Christoph Rieger, head of rates and credit research at Commerzbank.
The data and renewed COVID-19 fears may have caught out speculators betting on yields to rise -- net bearish bets on 10-year Treasury futures grew to 59,960 contracts for the week ended June 29, versus a net "short" of 2,313 contracts the prior week, according to the Commodity Futures Trading Commission.
"The market is structurally short and most people are positioned for higher yields ... so that is a pain trade, if you are short, you have a negative cost of carry, so each day where yields don't rise that costs you money," Rieger said.
Markets are now awaiting minutes of the U.S. Federal Reserve's June meeting in which it adopted a more hawkish stance, startling markets and sending 10-year yields almost to 1.6%.
Yields fell across the U.S. curve with the 30-year segment down three basis points to 1.97%. The gap between the 2-year and 10-year yields -- considered a fairly reliable gauge of economic health -- narrowed to 111 bps. It had been above 120 bps at the end of June.
(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Editing by Jacqueline Wong)
