Investors flocked to U.S. government bonds Monday as global markets fell into another risk-off funk, with European and U.S. stocks in a sharp selloff and oil prices falling once again.
The yield on the U.S. 10-year Treasury note fell to 1.75%, plumbing its lowest depths in a year. Treasurys have rallied since the start of the year as investors flee to safe havens amid global financial-market volatility and weakening economic data that began in China and has spread around the world. Yields on the 10-year haven't been this low since Feb. 2 of last year. Yields fall when prices rise.
Concerns about Europe, and tremors in its banking sector, emerged as a key driver in investor demand for safe-haven Treasurys on Monday. German financial authorities moved to close the German arm of Canada's Maple Bank on Sunday, with a spokeswoman for the regulator citing a "threat of balance-sheet overindebtedness."
Though the bank was small, with just EUR5 billion in assets, and the closure was related to a tax probe of the bank begun last year, it renewed worries about the health of European banks amid slowing economic growth and negative interest rates, in which banks have to pay to keep cash deposited in central-bank vaults. Shares of two of Germany's largest banks, Deutsche Bank AG and Commerzbank AG, were among the sharpest decliners in the Stoxx Europe 600 Monday, and banking shares have fallen nearly twice as fast as the index at large.
"The crux of the problem is European banks," said Priya Misra, global head of rates strategy at TD Securities in New York. "It's hard to say it's going to be contained. It's certainly going to spill over into the economy, and it's going to spill over into the global financial system because of these linkages."
Markets in China were closed in observance of the Lunar New Year, but heavy selling in Europe led the Stoxx Europe 600 index down 3.5%, and the Dow Jones Industrial Average was down 2.4% in afternoon trading. Oil prices also came under renewed selling pressure, with the benchmark U.S. contract falling below $30 a barrel again, down 3.2% at $29.90 a barrel.
Another bearish factor Monday came from data released by China over the weekend showing currency reserves falling to their lowest level in more than three years, raising concerns it could be forced to further weaken its currency amid slowing growth. Though the pace of decline was lower than expected, it inflamed concerns about follow-on devaluations in other emerging economies to remain competitive and jump-start growth.
"Global themes haven't changed much," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. "Overall it's still a pretty fragile market psyche. We haven't really recovered from the early blows of this year."
Investors are looking ahead to Federal Reserve Chairwoman Janet Yellen's testimony before Congress on Wednesday and Thursday, for any sign that the Fed may ease off previously expected plans to continue raising interest rates this year after implementing the first increase in nine years in December.
That action was taken amid a brighter economic picture that has since darkened, and the market has now discounted the possibility of any additional rises this year. Any signal that the Fed is backing off its plans could bring a shot of confidence to the markets, while any indications it is sticking with the plan could be a recipe for further turbulence.
By Christian Berthelsen