The global bond market rally is so crazy it’s starting to look like panic

Sovereign bonds surged, sending japan benchmark 10-year yield below zero for the first time, as investors seeking the safest assets gorged on government debt.

Treasury yields dropped to some one-year low and those on short-dated German securities dropped to records within the rush to refuge from a worldwide stock rout. Traders pared the odds the government Reserve will raise interest rates this season to 30 percent, before Chair Janet Yellen begins her two-day testimony to Congress on Wednesday.

It’s similar to a panic or anxiety. The flight to quality is exaggerated

There has become US$7 trillion of government debt with yields below zero globally, with the average yield on the Bank of the usa Merrill Lynch World Sovereign Bond Index at 1.29 per cent, the least in data which go back to 2005.

“It’s similar to a panic,” said Hideo Shimomura, the main fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management. “The flight to quality is exaggerated.”

The benchmark 10-year Treasury yield declined two basis points, or 0.02 percentage point, to 1.73 percent by 8:29 a.m. in London, based on Bloomberg Bond Trader data. The two.25 per cent security due in November 2025 rose 6/32, or US$1.88 per US$1,000 face amount, to 104 21/32. The yield was as little as 1.68 percent, an amount not seen since February 2015.

Japan’s 10-year bond yield fell as far as minus 0.035 percent, an unprecedented low for such a maturity in a Group-of-Seven economy. Volatility in the nation’s debt market climbed towards the highest since July 2013.

All German bonds maturing in eight years or less have negative yields, while 10-year bund yields dropped to 0.19 percent, the lowest since April. Australia’s dropped as little as 2.38 percent, also unseen since April.

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The rally this season has added US$1.4 trillion, or 3 per cent, to the market price from the Bank of America Corp. Global Broad Market Index.

About 29 per cent of the outstanding debt within the Bloomberg Global Developed Sovereign Bond Index was yielding less than zero by Monday. Switzerland’s 3 percent notes due in 2018 had the cheapest yield in the gauge, negative 0.95 percent, based on data compiled by Bloomberg.

Investors rushed to bonds Tuesday because the MSCI Asia Pacific Index of stocks slid 2.9 percent and Japan’s Topix Index plunged 5.5 per cent.



Equities Rout

“It’s hard to find grounds to short Treasuries,” said Tomohisa Fujiki, head of interest-rate strategy for Japan for BNP Paribas SA in Tokyo, talking about bets that the security will fall. Turmoil “is now affecting equity markets in civilized world too – and commodities and emerging markets haven’t stabilized yet.” BNP is one of the 22 primary dealers that underwrite the U.S. debt.

Yellen is scheduled to appear prior to the House Financial Services Committee on Wednesday and can address the Senate Banking Committee the following day. Futures contracts indicate traders visit a 30 percent possibility of a Fed rate rise in 2016, down from 93 percent at the start of the entire year.

Traders who’ve spent 2016 watching oil tumble are swapping crude using their monitors and loading their panels with bond metrics, said John Gorman, the top of dollar debt trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. Nomura is another primary dealer.

The flight to quality gained momentum Monday because of speculation Deutsche Bank AG would have trouble paying its debts, Gorman said. Germany’s biggest bank said in a statement it has a lot more than sufficient way to pay coupons on its riskiest debt both this year as well as in 2017.

“That actually spooked the market,” he explained. “People immediately thought there’s an issue where banks can’t pay and they can’t fund themselves to pay. It does feel like we’re reaching a point where the marketplace is panicked.”

Bloomberg.com