The US Treasuries rally on Tuesday as global stocks dropped, darkening outlook for the economy gave investors further cause for caution in the wake of the UK’s vote to leave the European Union.
The yield on the benchmark 10-year Treasury note fell 7 basis points to 1.390 percent and the yield on short-term 2-year note dipped 2-1/2 basis points to 0.573 percent by 12:40 GMT.
In the early European session, the US 10-year Treasuries yield fell to record low of 1.378 percent.
Moreover, the Federal Reserve Vice Chairman Stanley Fischer (voter in 2016) said that the FOMC is watching closely as it begins preparing for the July meeting, adding that the Fed will have a better sense of financial conditions as the meeting approaches. Overall, Fischer expects the economy to remain on the slow growth path that it has been on for some time.
However, Fed Vice Chair Fischer appears to take a more guarded approach, suggesting that the Fed is watching market conditions like everyone else, expecting to have a greater understanding of the UK referendum’s impact closer to the July meeting (though we see it as very much an extreme outside shot that the FOMC will be doing anything regarding rates in the near-term).
With respect to the UK’s Brexit vote, Fischer added that it is probably less important for the US than other countries. He further added that the Fed has no plans to move in the direction of negative interest rates in order to provide accommodation.
The probability of a Fed rate increase by year-end stands at 12 percent, from 59 percent a month ago, according to fed fund futures data compiled by Bloomberg. Economists estimate US employers increased payrolls by 175,000 positions in June, after unexpectedly adding just 38,000 jobs in May, the least since 2010.
Markets now look ahead to the FOMC Member Dudley Speaks at 18:30 GMT and June employment report next Friday, which could go a long way in getting that series back on track (at least closer to satisfactory).
Lastly, investors moved to safe haven buying after crude oil fell below $50 a barrel as concern about a potential slowdown in economic growth that would weigh on demand trumped supply outages in Nigeria and other exporting nations. Also, trade in one of Britain's largest property funds was suspended in one of the first signs of major financial stress following the country's vote to leave the EU. A flurry of data from China in coming weeks is expected to show weakness in trade and investment.
Meanwhile, the S&P 500 Futures down 13 points to 2,083.5 by 12:40 GMT.
