Traders work on the New York Stock Exchange on February 4, 2020.
Bryan R Smith | Reuters
As long as the coronavirus poses a threat to global economic growth, bond yields are likely to remain around record highs where they are trading as the disease threatens to turn into a pandemic.
US government bonds have been a haven for investors amidst cascading losses on Wall Street. The 30-year bond has again fallen below 2% recently, while the 10-year benchmark hit its historic low earlier this week.
Bond market professionals see a variety of reasons for this downward trend, including, but not limited to, the coronavirus epidemic. There is also general concern about global growth, concerns about negative rates in the United States and the ever-changing political landscape that has created uncertainty about what the government will look like in 2021.
“It’s hard to measure exactly what motivates him, but I think it’s a move away from a more moderate [coronavirus] The result has created some pressure on risk and supply in the rate market, “said Rick Rieder, BlackRock’s chief investment officer for global fixed income.” My feeling is that the most recent movement is the concern in Europe and Asia that the virus is spreading faster. “
The rally on Wednesday on Wall Street briefly curbed the drop in yields in the United States that began in mid-January as the coronavirus epidemic spread around the world.
However, the downward trend started well before this year. This decision is in fact part of a generational decline that dates back to the early 1980s and has accelerated, as global central banks have kept their rates low in order to stimulate the cessation of economic growth.
Even with the recent declines, US yields remain above most of their global counterparts, indicating that there may well be room for further declines.
“Maybe zero”
“What the coronavirus is doing is accelerating the change that was going to be the new line anyway,” said Robert Tipp, chief investment strategist and global bond manager for PGIM Fixed Income. “When things go wrong, the range is probably going to be zero handles all along the curve.”
“The United States cannot far exceed 1%” while the other central banks continue to fall, added Tipp.
In fact, the Federal Reserve is under pressure to further cut rates to prepare for a coronavirus-induced slowdown. However, there are doubts as to how effective reductions would be granted, given the gravity of the low interest rates and the difficulty of monetary policy in coping with a supply-induced shock.
Certainly, some also believe that the fall in rates could be reversed.
After all, economic data was solid after last year’s recession crisis. The Citi economic surprise index, which measures data against expectations, recently peaked in two years.
If the fear of the coronavirus passes, “investors should be prepared for the possibility of a bad reaction from the bond market because yields are already much lower than they were, traditionally, compared to the character of several economic fundamentals “, Jim Paulsen, Director of Investments. strategist at the Leuthold Group, said in a note.
For the moment, however, the trend in rates is weaker, with investors reacting to the spread of the virus and their countless other concerns.
“People are going to need a clear path to be able to guess the end point in terms of damage to the economy and when we are going to stabilize,” said Tipp. “We could be close to that, but it’s not clear at this point. It means there might be some risk aversion in the market.”
