The 10-year Treasury yield could soon be making history, heading into a virtual no man's land.
One of the closest-watched indicators in U.S. financial markets, the 10-year is the yield that determines the rates for home mortgages and a host of other loans.
Some bond pros say it may be about to sink below its July 2012 record low of 1.38 percent, given the right circumstances. One of those events could be next week's June nonfarm payrolls.
The 10-year was at 1.48 percent Thursday, pulled lower as bunds and U.K. gilts flirted with new low yields. But the big question is what will happen if it cracks the old low and falls into uncharted territory.
Technical strategists have no history to look back at to say the 10-year once held support here, or resistance there, once it dips beneath 1.38 percent. Analysts say it's quite possible the 10-year could even break 1 percent, though they are not necessarily expecting it to.
Technicians are eyeing a level on the charts where a channel formed after the Fed stopped hiking rates in 2006. That channel points to 1.15 percent.
"Given how it's been very technical, I do think breaking 1 percent requires a recession, or people really start to fear that's what we're heading for," said Nomura rate strategist George Goncalves. "People are talking about that. 1.25/1.30 is a good level to stabilize, and 1.15 is what technicians are looking at. These are just numbers, but nothing stops it from going lower."
The next economic event that could stir up big reactions in Treasurys is the nonfarm payrolls for June, expected next Friday. May's report bombed, with just a shocking 38,000 jobs created.
Economists are expecting 180,000 payrolls for June, but if there's an early warning from ADP's report Thursday that the estimate could be too high or the number misses the mark again, yields could sink lower. Some traders say buying ahead of the report could push yields lower anyway.
One factor bond strategists have been watching is the U.S. stock market, which has rallied after two days of losses from the surprise Brexit vote last week. They noted that if stocks were to go into a tail spin, yields would also be pulled down with worsening financial conditions and a flight-to-safety trade.
JPMorgan technicians earlier this week wrote: "We suspect the market will remain mostly in a 1.35-1.70% range now, with the risk for a blow-off move to 1.10-1.20% if the S&P 500 breaks recent range support. The blow-off potential is also derived from the US-German 10-year spread and that spread's correlation to risk market behavior."
Treasury strategists say the U.S. 10-year, and also other durations, are being driven lower in a relative value trade. The 30-year bond, for instance, has edged close to its all-time low of 2.223 percent.
in other parts of the world make the U.S. bond market more attractive. Add to that fears of instability in the world due to Brexit, and U.S. bonds draw in buyers looking for a safe haven. The bond world also has little faith that the Fed will be able to raise interest rates this year, given the uncertainty around Brexit and concerns about the global economy.
U.K. gilts rallied Thursday after Bank of England Governor Mark Carney said the central bank will need to inject more stimulus over the summer. The U.K. is not expected to have a new prime minister until September, and it is not expected to trigger the process of officially exiting the European Union until after that. Gilt yields fell to a new low near 0.86 percent, and the German bund was at a low -0.13 percent.
"We still think that U.S. Treasurys are probably the biggest game in town if you're running a global sovereign bond portfolio. There's no yield in Germany. There's no yield in Japan. Gilts performed well after Brexit. But in general I think the U.K. will become a less attractive place for capital flows," said Boris Rjavinski, director of rate strategy at Wells Fargo Securities. "We wouldn't be surprised if the strong bid for Treasurys will continue, and if that's the case, yields could certainly go lower."
Rjavinksi said 1.25 percent is possible for the 10-year yield, but the course will be determined by multiple factors, including inflation and the strength of the economy.
"We'll have to see where the market will find its equilibrium. Our official house view is 1.57 on the 10-year at the end of 2016. As a firm, we're not looking for the 10-year to go down to 1 percent," he said.
"Who knows what the inflation story will look like? Who knows what the growth story will look like? Who knows if there's more fracturing of the euro zone down the road. Now that the U.K. has left, is that the only country that will break away from the European Union?" Rjavinski said.
Update: Includes that ADP is released Thursday instead of its normal Wednesday release time
