With bond yields across the rest of the developed world already making new record lows every day, only the US had so far refused to take out all time lows set back in 2012. That finally changed overnight when the 10Y Treasury dropped -9 bps to 1.3784%, while the 30Y declined by the same amount, sliding as low as to 2.1914%.
The underlying dynamic for the bond demand is the same as that which has pushed all other bond yields to record lows: yields are plunging to record-low levels from the U.S. and Japan to the U.K., as a result of expectations of more QE by central banks, something which was confirmed by the US yesterday. "In the Tokyo market, there’s no interest rate, and there’s turmoil in the euro area,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has $63.4 billion in assets. “Money is escaping to the Treasury market."
However, the specific catalyst which helped push both Bund and US TSY yields higher, was a Reuters report that contrary to what Bloomberg reported yesterday, the ECB is not currently considering buying government debt out of proportion to euro zone countries' shareholding in the bank and the hurdle for abandoning this capital key is high.
Previously, bond markets rallied on Friday after Bloomberg reported that the ECB was considering giving up the capital key due to a shortage of German paper, which investors see as safe and have piled into in the aftermath of Britain's vote to leave the European Union. But sources familiar with the ECB's thinking said that several other changes would be first considered before any such move, which would be have heavy political ramifications, especially in Germany, where many are already uneasy about the ECB's quantitative easing.
In case of shortage of papers to buy, it would first consider raising the limit on how much it can purchase of each bond issue that is not protected by collective action clauses, the sources said. Or it would amend rules about which assets it can buy to expand the eligible pool.
"As in the past, we'll amend the rules if necessary but it's not on the agenda now," a Governing Council member, asking not to be named, told Reuters. "I would expect such changes to be quite technical. The capital key would be political, however."
So, while traders await for more clarity on what the ECB will do, they have decided to simply pile into the one bond that provides more yield than virtually any other DM TSY in the world: that of the US, and as Bloomberg explained, the long-end of the UST curve outperformed in London hours, where recent sessions have seen the sector supported by large buying by Asian real money. Volumes today show more bonds trading in 30Y cash than in 2Y, says one London-based trader.
The trader reasoning, as summarizied by Bloomberg: "10Y USTs break to new all time yield lows as bunds rally after ECB said to not debate abandoning capital key."
Also of note: 10Y Treasury futures volumes spike as all time yield lows are hit with ~10k trading 1-minute between 133-23/28+.
It appears that as we hit new record low yields, the scramble is just getting started.