NEW YORK, March 14 — Even in the mighty US Treasury market, bond traders are taking their cues from central bankers in Europe and Japan.

With Mario Draghi and Haruhiko Kuroda pressing ahead with their grand monetary experiments, negative yields in Germany and Japan are exerting greater and greater influence over US Treasuries. Overnight trading of Treasury futures has exploded, reaching levels not seen in years.

Ten-year US notes are also moving the most in tandem with German bunds since 2014.

The shift could have far-reaching consequences. As yields on trillions of dollars of euro-area and Japanese bonds sink further below zero, demand for Treasuries may mitigate any move by the Federal Reserve to push US interest rates higher.

What’s more, it may signal ultra-loose policies by the European Central Bank and Bank of Japan have the potential to undermine the Fed’s push to tighten, particularly if the dollar’s strength blunts inflation and growth.

“It used to be that everything was correlated to movements in US Treasuries and now the US seems to be following,” said Jim Caron, a money manager at Morgan Stanley Investment Management, which oversees US$406 billion (RM1.65 trillion).

Treasuries are “being more dominated by global events”.

Despite the backup in Treasury yields this month, they’re still far lower than they were in December, when the Fed ended its near-zero rate policy and lifted borrowing costs for the first time in a decade. Yields of the benchmark 10-year ended at 1.98 per cent last week, versus 2.27 per cent at the end of 2015.

Demand for government bonds has pushed borrowing costs in almost every industrialized nation down this year, with average yields on US$23 trillion of bonds falling to a record 0.69 per cent at the end of February, according to data compiled by Bloomberg. And more than a quarter of those securities yield less than zero.

A big part of it has to do with the unprecedented monetary easing that central bankers at the ECB and BOJ have undertaken to revive their moribund economies in the past year. In their latest announcements, the ECB surprised investors last week by dropping its deposit rate to minus 0.4 per cent, increasing its bond buying and incorporating company bonds as part of its purchases.

In February, the BOJ’s Kuroda added negative rates to its quantitative easing programme.

“Investors have to buy bonds,” said Hideaki Kuriki, a debt investor at Sumitomo Mitsui Trust Asset Management, which oversees US$59 billion.

“They can’t take risk.”

Those same forces are swaying the US$13.3 trillion market for US Treasuries. The proportion of futures trading in Treasuries that happens during Tokyo hours has jumped to about 8 per cent, from about 4 per cent mid-2015, data compiled by JPMorgan Chase & Co show. A Goldman Sachs Group Inc analysis of bond volatility showed that falling yields on Japanese government bonds have been defining the direction of the market.

Moves in Europe are also having a greater influence. Last month, the correlation of 10-year US notes to moves in German bunds rose to 0.6625, based on a 120-day rolling average (a reading of 1 means they move in lockstep).

That’s higher than at any time since December 2014.

The BOJ and ECB, “what they do will have a reasonable impact on Treasuries,” says Krishna Memani, who oversees US$204 billion as chief investment officer at Oppenheimer Funds Inc in New York.

With yields on benchmark 10-year Japanese bonds at minus 0.015 per cent, comparable Treasuries have a more than two-percentage point advantage.

Last month alone, Japanese money managers plowed a net ¥3.56 trillion (RM127.461 billion) into bonds abroad, the most since August 2010, according to the Ministry of Finance.

The downward pressure, along with worries that a slowing global economy will weigh on US growth, has forecasters chopping their estimates for how far 10-year Treasury yields will rise in 2016. They now expect yields to end at 2.35 per cent from 2.82 per cent in January.

The demand also shows that investors are skeptical the Fed can raise rates as much as some policy makers have indicated. Based on the median projection of Fed officials in December, they expect to raise the benchmark rate to 1.375 per cent by year-end. Traders on the other hand, don’t see borrowing costs approaching 1 per cent.

The Fed’s next policy meeting will be on March 15-16.

Policy divergence among central banks and ultra-low rates around the world are wreaking havoc in markets and making it harder for US investors to know what to expect. Volatility in Treasuries have risen to all-time highs, while trade failures have increased in the overnight funding market as demand for 10- year notes has soared.

Despite the turbulence, some investors are convinced the Fed will stay the course and raise rates as improving US economic data boosts the outlook for growth and inflation. According to Citigroup Inc, the strength of US data relative to analyst forecasts has climbed to the highest since November.

“US economic growth will continue, inflation will move up,” said David Kelly, chief global strategist of JPMorgan Funds. He anticipates the Fed will probably raise rates three times in 2016. “The US will be a lot more healthy over the next year than either Japan or Europe.”

Some investors, such as Oppenheimer Funds’ Memani, are less sanguine. They say that extraordinary easing by the BOJ and ECB will weaken the yen and euro against the dollar and export deflation to the US That in turn may undercut any inflationary pressures building up in the world’s largest economy and hamper growth—just as Fed officials are looking to tighten.

While the dollar has slipped from its all-time high in January, forecasters expect the greenback to appreciate against 14 of the world’s 16 major currencies this year, including the yen and euro. Over the past two years, the dollar has surged almost 20 per cent against a basket of currencies tracked by Bloomberg. In the same span, inflation in the US has averaged less than 1 per cent.

Some policy makers have already taken note.

Fed governor Lael Brainard told CNBC television on March 7 that the US economy was being buffeted by “powerful cross currents” from abroad and a further rise in the dollar would hit exports. Fed Vice Chairman Stanley Fischer also alluded to the dollar dilemma when he spoke in January.

“Because of what every other policy maker is doing, ECB or BOJ, you may have a situation where the dollar strengthens and slows down the US economy meaningfully,” said Memani. Dollar strength may tighten “financial conditions in the US far more than what the Fed wants to.” — Bloomberg