What do investors want? Top tier government bonds!

When do they want it? Now!

Risk aversion is dictating the mood in the market for a third straight day on Wednesday, with equity markets coming under pressure and demand for haven assets pushing yields on US government bonds to fresh record lows.

The yield on the benchmark 10-year Treasury note fell by nearly another six basis points to 1.3180 per cent during early morning trading in the US, breaking the previous intraday low of 1.3549 per cent set just yesterday.

Deutsche Bank puts this in context. Very very long-term context:

It expects the 10-year yield to sink to 1.25 per cent in t he coming months, and says:

We think that the post-Brexit rally has come primarily by virtue of lower Fed expectations. The implication is that further declines in the risk premium could produce even lower yield outcomes given capital flight from Europe and the UK. An ECB departure from capital keys could prove a catalyst for just this sort of behavior to the extent that the available supply of higher yielding peripheral debt is reduced by ECB balance sheet expansion.

The timing for a potential Italian bank bail in is particularly regrettable. A bail-in would likely have adverse effects on European banks more generally and would do nothing to help resuscitate the credit impulse for growth. A bail in could force the issue with ECB policy instruments, potentially pushing the ECB toward more direct support for the banks.

It has been a similar story today for the 30-year Treasury note, with yield hitting a new low of 2.0984 per cent in early trading, easily beating the record intraday low of 2.1294 per cent set just a day earlier.

Wednesday’s moves are the latest records set in this year’s sovereign debt rally, which has been given massive fillip by the UK’s shock decision to leave the EU last month. Uncertainties over the impact that Brexit could have on already fragile global growth along with expectations that major central banks will keep interest rates lower for longer have added further fuel to the rally.

Indeed, it was another record setting day not just for US bonds. Sterling sank to a new 31-year low of $1.2796 earlier while benchmark 10-year government debt yields from Germany, the UK, Japan, Switzerland, France, Denmark and Sweden all fell to fresh historic lows.

Here’s a quick round-up of the new record lows set on Wednesday:

  • US 10-year: 1.3180%
  • US 30-year: 2.0984%
  • UK 10-year: 0.729%
  • German 10-year: -0.205%
  • Japan 10-year: -0.282%
  • Switzerland 10-year: -0.629
  • France 10-year: 0.1005%
  • Sweden 10-year: 0.0745%
  • Denmark 10-year: -0.0059%

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