Real yields on U.S. Treasuries hit minus 1% on Friday, reflecting investors’ willingness to pay for safe assets as a surge in coronavirus cases threatened the country’s nascent economic recovery.
Real 10-year Treasuries yields – which remove expected consumer price changes from nominal bond yields – fell minus 1.005% on Friday, from 0.979% on Thursday. Yields fall as bond prices rise.
The decline took real yields to a level hit only at the onset of the market turmoil in March, when investors rushed for safe-haven assets – and below their 2012 level, when the Federal Reserve announced a program. purchase of open-ended bonds to remove rates. and stimulate economic growth.
The decline in real yields, achieved using inflation-protected Treasuries, reflects traders’ expectations that the US central bank will not raise interest rates over the next several years. Data released Thursday showed the US economy suffered its sharpest post-war contraction in the second quarter. A day earlier, the Fed linked the economy’s prognosis to the pandemic, as it was keeping rates close to zero.
“The path of the economy will depend to a very large extent on how the virus evolves and what steps we take to keep it under control,” Fed Chairman Jay Powell said. “It’s just a very basic fact about our economy right now. The two things are not in conflict. “
Jim Caron, senior portfolio manager at Morgan Stanley Investment Management, said the Fed is “unwavering, unwavering and without excuse [its] desire to keep key rates low as long as possible ”.
Rising coronavirus cases and deaths in parts of the United States, along with economic indicators suggesting a hesitant recovery, have fueled expectations that the Fed will keep rates pegged near zero for years to come, said Eric Stein, Co-Director of Global Fixed Income at Eaton Vance.
Traders are now betting that the Fed won’t raise interest rates until at least 2023, according to the futures markets. The benchmark 10-year Treasury yield fell 0.04 percentage points this week to 0.55%, just a hair above its historic closing low, according to data from Bloomberg and the US Treasury.
Futures for the 10-year note were settled at their highest price since at least 2003 on Thursday, according to brokerage firm CME Group.
Investors are now preparing for the next scheduled Fed policy meeting in September. Speculation has intensified that the central bank would announce a more explicit form of forward guidance for the future path of interest rates, linked to parameters such as the level of unemployment or the rate of inflation.