Traders signal offers in the Ten-Year Treasury Treasury Options Box at the Chicago Board of Trade.
Scott Olson | Getty Images
Bond yields are heading south, and it seems they are unstoppable for now.
The benchmark yield on 10-year Treasury bills, which affects everything from business loans to home mortgages, has been at rock bottom lows for three years, standing at 1.45% on Wednesday. That's less than the 2-year yield of 1
The 30-year government bond yield fell to an all-time low of 1.91% on Wednesday as yields around the world reversed. slipped to perennial or record lows. US interest rates followed a global decline, with the Japanese 10-year yield falling to a new negative three-year low and the German 10-year Bund yield slipping to its own record of -0.72%.
"This is a big deal," said Gregory Faranello, head of US Treasury at Amerivet Securities. "The momentum and the trends that are currently in place are pretty consistent, I do not see anything that could change momentum right now, we're in the final stages of the summer months, liquidity is definitely a problem, if you look at that. " It includes many different things at the moment. Today we have the headline from Britain, you have this ongoing trade war and this global yield structure just keeps unfolding.
Strategists said the bond market has caught up with a number of forces and is now attracting investors who need to buy yields that are getting lower as bond prices rise. "In recent days, investors have begun to believe that trade wars are between The US and China are very likely to last a very long time, possibly until after the presidential election.
The global economy is slowing down and there are increasing signs of a warning that Europe may be in recession, the slowdown China has shaken the emerging economies where exports have declined.
Then there are political uncertainties that became even dimmer on Wednesday in the UK, after Prime Minister Boris Johnson had pushed back the reopening of Parliament by mid-October, around the duration limit the debate and di e chances to raise Brexit without a deal. The pound sterling fell and the 10-year gold yield fell to its lowest level in three years.
"The catastrophic scenario is when yields drop dramatically from here," said Michael Schumacher, Director of Rates at Wells Fargo. "Hypothetically, if the trading situation gets worse, if Hong Kong goes bad and Brexit leads to a tough exit … then there will probably be a massive rally in Treasurys again."
"Anyone who hands you a hard forecast in this scenario is throwing arrows," he said. After breaking the psychologically important 1.50% level on Tuesday's 10-year yield, Schumacher said investors are looking for the next target for the benchmark, at the record low that they set in the weeks following the vote For the Brexit or the exit from the European market had reached Union.
"People seem to be fixated at 1.35%," he said.
For investors, a good place to hide could be in very short-term treasuries. For example, the one-month Treasury note yielded 2.06%, well above other securities. "Why be a hero?" he said.
Many strategists do not expect US bonds to trade negative returns to the rest of the world, but they admit that this could happen. The other side of the declining earnings history is that bond yields could rise quickly if, for example, the trading situation improved significantly. Strategists, however, are skeptical that this will happen soon.
"Obviously, the trade war is such a big chunk of it and it remains so incredibly unpredictable that most people feel so overwhelmed that it's highly unlikely they'll get anywhere," said Ralph Axel, strategist at the Bank of America Merrill Lynch. He said people are wondering why China would sign a long-term deal with President Donald Trump before the elections.
Sinkhole of Global Returns
Another important factor that lowers returns is the fact that bonds worth more than $ 16 trillion are in circulation. The world now has negative returns, and the US Treasury was a magnet for investors looking for returns and security.
Axel said he has a 10-year target of 1.25% and he also expects 30% annual return to be at that level by the second quarter of next year.
Faranello said returns would decline as shoppers attract more buyers as investors seek to bond to returns. The question is whether the consumer who has stopped the US economy is starting to react, which scares the markets.
"If you're a US consumer, you see volatility in the markets, you do not understand it, you see negative interest rates, you see the inverted yield curve that consumers do not understand, and there's talk of a recession." said Faranello. "This could happen eventually, and the Fed has to keep an eye on it."
Data for next week may be important as it includes the next Friday's monthly employment report as well as ISM production and the PMI. two indicators pointing to a slowdown in the manufacturing sector
"The yield curve basically tells us that we are aiming for zero percent GDP growth next year, which would imply the front end of the curve The yield curve wins or policymakers will be able to support the data sufficiently, "said Faranello. "I have no idea how it will turn out, but there is an incredible fear and focus on a recession."
Central banks behind the curve
Central banks around the world have pushed down interest rates as their economies slow down. and the worry is that they are in a race to the bottom while defending their currencies. Another concern is that they do not have the ammunition they had before the financial crisis, because so many have made extraordinary looser efforts or already have extremely low rates. They also failed to boost inflation in the decade since the financial crisis.
It is widely expected that the Fed will cut interest rates by a quarter point when it meets on 17 and 18 September.
"I think the Fed has to go 50 [basis points] .I think the Fed needs to change the tone globally, they have to hit it on the way to September, they have to hit it 50. You have to change the tone and . " Psychology of the market. Right now we're in a vice, "said Faranello.
Even before the Fed meets, the European Central Bank will meet on September 12 and is expected to take action, even if it has already done so possibly announcing asset purchases.
"We will see what the ECB is doing. They have many bad choices, "said Faranello," They probably will do different things, but the market is not convinced that they have much power to move the economy, and you'll have to start thinking about tax hikes, but that It's a tough process if you have. "A union [political] The big problem is that central banks around the world are out of bullets and moving south at the same time … They feel that the central banks' put positions are are less powerful.