The 10-year US Treasury yield fell by more than 35bp in May, hitting a record low of less than 1.6% as investors sought refuge in high-grade government bonds. The main trigger for the rally was a renewed flare up in the euro-zone crisis after the first round of Greece’s general election produced no clear winner. This raised the prospect of the country’s early exit from EMU and ignited fears about the risks of currency redenomination in the euro-zone more generally. Concerns grew about the prospects for larger, troubled countries in the region with fragile banking sectors at risk of depositor flight, especially Spain. 10-year government bond yields in Germany and the UK dropped even more sharply than in the US.
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