Frantic Treasury Rally Sees Whole Yield Curve Sink Below 1%
The entire Treasury yield curve tumbled, trading below 1% for the first time in history as investors grappled with the worst global crisis in more than a decade. A drop to 0% is now priced in swap markets.
Panic ensued Monday, with the latest leg of the blistering bond rally fueled by an all-out price-war among the world’s largest crude producers. Risk assets tumbled with S&P futures dropping 5% to hit circuit breakers.
The spread of the coronavirus and its fallout on supply chains and consumer spending have seen a dramatic repricing of global interest-rate expectations in the past month. The jolt lower in oil from the price war will add to downward pressure on inflation, where the Federal Reserve has already consistently struggled to meet its 2% target.
“The more I think about it, the more it makes sense to me that that the U.S. cash rate will fall below zero some time very, very soon,” said Chris Rands, portfolio manager at Nikko Asset Management Ltd. in Sydney. “I wouldn’t be surprised if the U.S. tries negative rates, especially with the tailspin in oil now adding to the virus fears.”
The stampede for Treasuries comes after a weekend dominated by crisis-headlines including the oil price-war, plunging Chinese exports and Italy’s emergency quarantine.
After sitting on the sidelines for two days, investors piled into Treasuries, driving 10-year yields down 30 basis points to 0.47%, while the 30-year fell to 0.96%. The 2-year yield declined 22 basis points to 0.29%.
Treasuries, the world’s deepest pool of haven assets, had been rallying in the past three weeks as the virus wrecked havoc across the globe. Federal Reserve Chairman Jerome Powell surprised markets last week with an emergency rate cut of 50 basis points, raising the specter that the global virus fallout will be longer and worse than anticipated.
“It’s a dire situation,” said David Choi, head of Australian macro-fixed income at Aberdeen Asset Management Ltd. in Sydney. “Leading up to all this, markets have had developed a learned behavior of buying the dip because there was a Powell put – but this time around the Powell put is not going to fix the virus.”
The Fed is still expected to try its best with the tools available. Markets are pricing almost 75 basis points of rate cuts at the March meeting, with a return to the 0% lower bound expected by the end of the year.
Investors are also piling into bonds from Australia to Japan. Japan’s 10-year yield dropped as much as 5.5 basis points to minus 0.2%, the lowest since October. Yields in Australia and New Zealand tumbled to new lows.
“The market is panicking,” said Shinji Hiramatsu, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co. in Tokyo. “Position adjustment, loss-cut buying and all sorts of buying are emerging. Everybody’s buying Treasuries.”
— With assistance by Chikafumi Hodo
Source: Read Full Article