Risky assets including stocks are suffering from a serious case of “Brexit Blues,” which forced investors to park their money in safe-havens such as bonds. Fed Chair Janet Yellen had said that U.K’s decision to leave the EU would “usher in a period of uncertainty” and fuel volatility in world markets.
As demand for bonds climbs, yields decline and term premiums are pushed lower. In this scenario, income seeking investors are lured toward funds having exposure to dividend paying stocks. On top of it, diminishing chances of a rate hike have made these bonds more attractive.
Low Bond Yields
Britain’s vote to leave the EU caught markets off guard and magnified concerns about fresh bouts of volatility in the financial markets worldwide. Concerns that such an outcome will destabilize the region’s economy compelled investors to embrace relatively safe-haven assets including U.S. government debt. As investors started to buy bonds, yields plummeted to record lows.
Thanks to Brexit induced market volatility, the 10-year Treasury yield has declined to 1.39% from 2.27% at the beginning of the year. The 30-year Treasury yield, on the other hand, plummeted to a record low of 2.098% yesterday before recovering to 2.12%.
Yields on other nations’ debt are even lower. Yields on Japanese and German debts are, in fact, negative. Yield on 20-year Japanese debt fell below zero for the first time ever on Wednesday, while yield on 10-year government debt of Germany had dipped below zero for the first time ever last month.
Term Premium Falls
Bank of Japan and the European Central Bank are buying government bonds, while the economic fallout from Brexit is expected to force the Bank of England to take a similar step to stimulate its economy. As discussed above, heavy demand for Treasuries are not only pushing yields lower but also dragging Treasury term-premiums down. The term premium on the 10-year Treasury went down from 0.07 percentage points to a record low of negative 0.71 percentage points yesterday.
No Comments