Traders in the 10-year bond options pit at the Chicago Board of Trade signal orders.
Frank Polich | Reuters
A key interest rate is approaching levels last seen in the fall, when markets were worried about the trade war, and falling yields could be a wake-up call.
Investors are buying a lot of bonds this week, fearing the coronavirus will spread and affect the global economy. Yields are moving in the opposite direction from the price, so that when investors jumped, the yield on 10-year notes fell to 1.68%, their lowest level since early November, and could continue to fall.
Over the past week, the yield has dropped 1.83% as investors feared the virus could have an immediate impact on the economy in China and Asia as a whole, and ultimately cool global growth. The 10-year period is important because it affects a variety of loans, including mortgages.
But the spread of the virus, which disrupted transportation in Wuhan and other Chinese cities at the start of the Chinese New Year, is not the only factor weighing on bond yields.
“The question is what the economy is going to do this year, and I think right now the 10-year note says that we don’t really know, but given what we saw in 2020, that tells us we have to cover each other, “said Gregory Faranello, US rate manager at AmeriVet Securities. Weak recent labor data and lack of inflation have also been factors, and Faranello said the Boeing problems could jeopardize US GDP growth as it will reduce output.
Some strategists say the Fed and other central banks could have an even bigger impact on rates and appear to be sending investors in bonds and stocks at the same time. Stocks were down on Friday due to concerns about the coronavirus, but the top three stock indexes are about 1% below their recent highs.
“We are at the bottom of a recent range [on yields]. It is a number of factors. The first is that the fundamentals with which we entered the year are more firmly entrenched, “said Mark Cabana, head of US short rate strategy at BofA Securities.
“You have global central banks waiting. You have a relatively benign growth and inflation environment. We are not in a recession and will not be in any time soon.”
Investors have made offers on both corporate and equity credit since the start of the year. “You also have an environment in which risky assets have worked well,” said Cabana. “There seems to be a thirst for return in all asset classes. There is still a very significant need for duration from the insurance and pension community.”
Many strategists expected Treasury yields to rise more this year, as did stocks, partly due to the improved economic outlook as a result of the trade deal signed by the United States and China. .
“This drop in rates that we have seen so far this year indicates that there is some pain on the part of some who thought rates were going up,” said Jon Hill, senior rate strategist at BMO.
BMO strategists say it is possible to reduce the 10-year rate to 1.427%, a level it reached in late August. After the current level, the next decreasing technical area would be 1.668%, an intraday low in early November. Then the low return of 1.503% in September could be at stake, and after that, the return could head to 1.40.
The Fed is not expected to take action at its meeting next week, but should signal that it will continue to keep rates low and will not change policy anytime soon. Fed President Jerome Powell is expected to confirm that the Fed plans to continue building its balance sheet with purchases of T-bills for some time to come. These two elements could keep the pressure on yields.
The combination of the Fed’s policy of ease and that of other central banks has made American assets particularly attractive. As the Fed keeps interest rates low, bankers in Europe and Japan have negative returns, and this is another factor pushing investors into the US bond market – and also into stocks.
“That’s the question on the table. Which market is right? Is the bond market saying one thing and the stock market is saying something else? It’s a showdown,” said Faranello. “To me it goes back to the liquidity of the central bank, and the market is flooded with a ton of liquidity and that liquidity has to flow somewhere. Do they say the same thing? I think so.”
Hill said the diversion between stocks and bonds is notable as stocks have recently peaked. “I think the bond market is listening to a combination of the data and the Fed. The data suggests that even after a phase one trade deal, even after 75 basis points of Fed rate cuts, the US economy remains confronted headwinds, “he said. “They may be fewer than before, but they are still substantial.”
Hill said central banks have stressed that rates will not go up anytime soon. “It will be difficult for the 10-year yield to return to 2% unless a large part of this trade is reflation.” So far, there is no indication that inflation is hitting the Fed’s 2% target, so rates may not be out of their current 1.50% to 2% range anytime soon, some say. strategists.
However, Jim Caron, portfolio manager at Morgan Stanley Investment Management, said he believed the 10-year period reflected concerns about the coronavirus more than other factors.
“I think it is a reaction to the coronavirus,” he said. “Most people think that global growth is going to be stable and increase a little … I think the downside yield is limited. At the moment, it’s hard to put a number on it. It’s more of a cover . If I want to own stocks, but I’m a little worried, then I also want to hold Treasurys. “