Bond market bullishness ramps up

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

In the face of a weakening global economy, U.S. Treasurys are finding a lot of fans.

That was apparent in Thursday's $16 billion 30-year bond auction, which saw strong demand for a long bond yielding 3.22 percent, the lowest at auction in more than a year.

Non-dealer bidding was strong 70 percent, well above the 55 percent norm. After the auction, Treasurys rallied sharply, with the 30-year yielding 3.19 percent.

Bonds have been bid higher in recent sessions on geopolitical concerns as well as signs of economic weakening. Yields move in the opposite direction and have fallen across the curve.

"It's a combination of things. It was questionable data, mixed data out of the U.S. this week," said Adrian Miller, director of fixed-income strategy at GMP. "You had the Bank of England's inflation report, which was dovish … and then you had the GDP data out of Europe which was terrible. Those three things, plus nothing different coming out on the geopolitical front has lent itself to this kind of push for yield. That's what pushed the German 10-year below 1 percent today."

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Weak euro zone and German GDP raised speculation the European Central Bank will have to provide further stimulus. The Spanish 10-year yield fell to 2.49 percent and Italian 10-year was yielding 2.64not far above the 2.40 percent in the U.S. Treasury.

"This week a major influence has been the behavior of the European bond market," said Tony Crescenzi, Pimco strategist. "The market is short. This is coming at a time when the issuance of Treasurys is shrinking because of the shrinking budget deficit—nearly a half a trillion this year versus a peak of $1.4 trillion, and a time when the world of safe assets have shrunk."

Crescenzi said other factors are low inflation and the Fed's communicating that there won't be a rate hike for about a year.

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"We don't expect a meaningful break through the range. Our base case is growth to hold up at 2.5 to 3 percent in the year ahead. This likely keeps the 10-year close to its new 14-month-old trading range," he said, noting the range is 2.40 to 3 percent.

"The short base does create risk that there could be a technically driven break," he added.

The 10-year touched an intraday low of 2.34 percent last Friday.

By CNBC's Patti Domm