10-year Treasury yield ends at 21-month low

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U.S. Treasury yields fell Tuesday after European Central Bank President Mario Draghi insisted he could carry out further rate cuts and other policy easing measures to boost the flagging eurozone economy.

What are Treasurys doing?

The 10-year Treasury note yield fell 2.6 basis points to 2.06%, its lowest close since September 2017. The two-year note yield was virtually unchanged at 1.867%, while the 30-year bond yield retreated 2.6 basis points to 2.552%.

The German 10-year bond yield plunged 7.6 basis points to negative 0.32%, a new all-time low. German government paper is considered a proxy for the overall eurozone bond market, and can influence trading in Treasurys.

What’s driving Treasurys?

In a speech at the ECB forum at Sintra, Portugal, Draghi dropped clear hints that the European Central Bank could ease policy further to resuscitate inflation amid doubts among market participants that monetary policymakers still had ammunition to expend.

Draghi said the central bank should not “resign itself to too-low inflation.” He added that “in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”

Business confidence took a tumble after the German ZEW survey showed economic sentiment in Germany fell to a negative 21.1 in June, from negative 2.1 in May.

The bond-market rally lost impetus later after President Donald Trump said in a tweet he would meet with his Chinese counterpart Xi Jinping at the June 28-29 G-20 meeting in Japan. His remarks spurred a rally in risk assets and dampened demand for government paper.

The S&P 500 gained 1% on Tuesday, putting it around 1% below its all-time closing high set on April 30.

What did market participants say?

“People put a lot of stock in the Trump-Xi meeting, but there’s been a lot of disappointments on that front in the past. Is the Fed really going to want to react when that’s still a big point of uncertainty? They probably want to see how the trade issue plays out,” Julien Scholnick, a fixed-income portfolio manager at Western Asset Management, told MarketWatch.

Scholnick said a rate cut in July was more likely. By that time, investors could take stock of the progress made between Washington and Beijing to ease trade tensions after the G-20 meeting.

What else is on investors’ radar?

U.S. housing starts for May ran at annual pace of 1.27 million, above the 1.23 million expected from analysts polled by MarketWatch.

The Federal Reserve kicked off their two-day meeting later today, as investors expect the U.S. central bank to signal an interest rate cut later this year. Still, a small minority of analysts say the Fed could ease policy on Wednesday.

Check out: Housing starts slip, but permits rise as all signs point to stronger growth ahead