Negative Yields in Japan Driving U.S. Bond Strength Ahead of Draghi

Japanese bond yields have managed to hit a new low. This happened on a day where stocks were selling off after three weeks of gains, so it seems to have helped push down yields in the United States and also in Europe’s key markets of the United Kingdom and Germany.

As reminder on the inverse effect of yield and price, when prices rise it pushes the yields on bonds lower. What was interesting about this bond rally in Japan was that a 30-year Japanese government bond auction was very strong.

The strong bond action in Japan even helped U.S. Treasury yields get back under 1.90% on the 10-Year Treasury Note. The yield on the 10-year Treasury was back just above 1.90% on Monday but that yield was back down around 1.84% on Tuesday afternoon.

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Now look at Japanese yields being -0.09% for the 10-year note. Yes negative rates on the 10-year. Germany’s 10-year yield was 0.18% and the yield on the 10-year U.K. bond was last seen at 1.39%.

Demand for U.S. treasuries is partly being driven by negative rates in some European maturities and lower rates in Japan and other safe markets.

Investors need to keep in mind that Europe and most of Asia are looking for ways of further easing, with quantitative easing being the current flavor of easing. Federal Reserve presidents in the United States still want to raise rates back to a hope of normalization.

Chinese trade data may have added to bond strength, as the trade figure were weak.

Now all eyes are on Mario Draghi, who is expected to go with even further negative interest rates in his quantitative easing measures this week.

And just to think – even Bond King Bill Gross recently trashed the returns versus the risks in longer-term Treasury and government debt. He was particularly worried about high-yield debt — imagine how he feels when governments have negative rates.

Stay tuned.