U.S. Treasury Sells 30-Year Bonds At Record Low Yields

The U.S. Treasury Thursday sold 30-year bonds at record low yields of 2.58 percent, well below the previous auction's yield of 2.72 percent. The low yields confirm the flight to safety that has been seen in financial markets over the last few trading days.

The U.S. Treasury sold $13 billion of 30-year bonds at a yield of 2.58 percent and also saw strong demand. The bid-to-cover ratio rose to 2.7 from 2.4, meaning that there was more demand than the previous auction. This comes just one day after the Treasury sold 10-year bonds also at record lows. The ten-year bonds were sold Wednesday with a low yield of 1.459 percent, the lowest on record. Also, the bid-to-cover on this auction rose to 3.61 from 3.06.

The strong demand and low yields seen at U.S. debt auctions is just the latest in a sequence of strong debt auctions seen by safe-haven issuers. For example, all German bonds less than three years in maturity traded with negative yields Thursday. France has also seen bond yields go negative, as yields of maturities less than 9 months traded negative. Switzerland and Denmark are two other nations that have seen yields go negative.

The flight-to-safety in bonds seen over the last six-to-twelve months can be explained by continued weakness in peripheral economies' finances and also by the lack of good collateral in markets. As Spain and Italy have been thrust to the forefront of the European Debt Crisis, investors have sold Spanish bonds and bought safer bonds, including German bonds. Also, the capital flight out of peripheral banks to core ones has seen investors clamor to these safe bonds for any yield. Lastly, the LTRO's forced banks to buy up safe bonds to use as collateral to receive the loans. With these bonds parked at the ECB, the supply of safe assets has been reduced. Simple supply and demand economics states that, as supply falls, all else equal, prices rise. Since bond yields move inversely to prices, yields have fallen.

If investors see European credit conditions worsening, it could cause the European Central Bank to launch a third round of LTRO's. Should this be the case, safe bonds could continue to rally. Investors could buy the iShares Long Bond ETF TLT to implement this thesis.