Government bonds have held near multi-year lows on bets the US Federal Reserve would cut interest rates this month and that other major central banks would embrace looser monetary policy, pushing world stocks to new 18-month highs.
Benchmark debt yields held near record lows in the wake of their recent rally, with Germany’s 10-year Bund yields just off a historic low of minus 0.39 per cent hit on Wednesday.
US 10-year Treasury notes had hit their lowest since November 2016 on Wednesday, pushed down by bets that the European Central Bank’s next chief will maintain a dovish policy stance to buoy the euro zone economy.
“For central banks, everyone is expecting dovish moves, not only for US but also for Europe and even Japan,” said Christophe Barraud, chief economist at Market Securities in Paris. “Everybody is a optimistic for quick central bank moves.”
The fall in US Treasuries came after a report showed US companies added fewer jobs than expected in June, raising concerns the labour market is softening even as the current US economic expansion marked a record run last month.
With Wall Street closed for the Independence Day holiday, the market’s focus is now on Friday’s US non-farm payrolls, which economists expect to have risen by 160,000 in June compared with 75,000 in May.
Separately, US President Donald Trump on Wednesday repeated his call for the United States to manipulate currencies and pump money into their economies.
In the euro zone, government borrowing costs have fallen to record lows after EU leaders agreed late on Tuesday to name Christine Lagarde as the ECB’s new president.
Lagarde, the current International Monetary Fund head, is widely expected to maintain the dovish stance of current ECB President Mario Draghi.
On Thursday, German Bunds flirted with the ECB’s minus 0.40 per cent deposit rate, a closely watched psychological mark, though traders did not think it would be broken. “We don’t expect it to be breached today,” said Peter McCallum, rates strategist at Mizuho. “There will not be enough catalysts to get through that point and there is a lot of supply.”
The action in bond markets buoyed stocks. MSCI’s all-country world index eked out a 0.1 per cent gain after hitting its highest since February last year a day earlier.
Equity markets across Europe were flat, with the Euro STOXX 600 unchanged amid thin volumes. The three major US stock indexes finished at record closing highs on Wednesday.
Italian 10-year bond yields also slumped to their lowest since late 2016 after the European Commission dropped its threat of disciplinary action over Italy’s public finances, pushing the country’s main bourse to a new two-month peak.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2 per cent.
Expectations for rate cuts by the Fed saw the dollar drift away from recent highs, though currencies were by and large quiet in early European trade.
The dollar index against a basket of six major currencies was unchanged at 96.767.
The euro traded at $US1.1284, slightly higher than its two-week low of $US1.1268 touched on Wednesday.
FX strategists said that although the drop in US Treasury yields overnight was negative for the dollar, softness in other currencies was lending some support.
“We are seeing some euro weakness and some dollar weakness, and the two are cancelling each other out,” said Thu Lan Nguyen, FX strategist at Commerzbank.
“What is happening in US and euro zone monetary policy will also determine what happens in smaller countries,” she added.
In commodity markets, oil slumped on data showing a smaller-than-expected decline in US crude stockpiles and worries about the global economy.
Brent crude futures, the international benchmark for oil prices, were down 0.7 per cent at $US63.36 per barrel by 0844 GMT.