Trade tensions, global growth fears and expectations for policy easing have all combined to bring the all-important 10-year Treasury yield to a nearly 1 ½-year low — a key psychological level.
The bond-market rally has driven the 10-year Treasury note rate TMUBMUSD10Y, -1.25% down 4.4 basis points to 2.375%, briefly touching an intraday nadir at 2.361%, which represents the lowest level since Dec. 2017, based on Tradeweb data. Bond prices move in the opposite direction of yields.
Analysts say the movements of the benchmark note yield bears attentiveness as yields for benchmark, long-term Treasurys determine borrowing costs for a multitude of debt, ranging from mortgages to auto loans, thus serving as a key gauge of the lending market and, therefore, financial conditions.
Here are three reasons investors have cited for the recent, precipitous Treasury-yield slide.
President Donald Trump ramped up tariffs on Chinese imports, drawing the announcement of retaliatory duties from Beijing set to take effect on June 1.
Stock-market bulls had bet on a rally in assets perceived as risky at least partly in anticipation of a near-term U.S.-China trade resolution, even if a Sino-American deal wasn’t comprehensive. As equities lost altitude, jittery investors rushed to the perceived safety of government paper.
The S&P 500 index SPX, +0.76% and the Dow Jones Industrial Average DJIA, +0.61% have both has declined by 4% in May. Over that same period, China’s CSI 300 index 000300, +2.25% was down 4.8% and the Stoxx Europe 600 index SXXP, +0.46% fell around 4.4%.
The 10-year Treasury yield, meanwhile, has shed more than 15 basis points since May 6, when the dispute resurfaced.
Global growth slowdown
The intensifying trade spat, reignited by Trump allowing import duties on China goods to be raised to 25% on May 10, has revived fears of an international economic slowdown that had begun to show signs of stabilizing in Asia and in the eurozone, amid China’s fiscal stimulus efforts.
“The first recession casualty could well be Europe, particularly the industrial leaders of Germany, France and Italy,” wrote Jim Vogel, an interest-rate strategist for FTN Financial, referencing China’s strong trade relationship with Europe.
Beyond tariff tensions, strategists say Beijing’s economy remains fragile, with a breakdown potentially amplified by China’s reliance on debt to spur expansion.
“In an environment where Chinese policymakers are becoming less willing to act as the world’s spender of last resort, global fiscal stimulus is ebbing and monetary policymakers’ capacity to boost demand substantially further is in doubt. Any strong and sustained global pick-up from here seems hopeful, particularly if US-China trade tensions mount further,” wrote Ben May, director of global macro at Oxford Economics.
That dynamic has supported purchases of government debt.
Tariffs + slowing growth = deflation
Investors also said the recent bond-market rally may reflect the degree to which the fixed-income market is looking past the inflationary impact of higher tariffs, which should send debt prices lower and yields higher, to focus on the deflationary impact of a global trade slowdown and slower growth.
The search for havens as trade fears take hold “outweighs the inflationary impact of companies passing down higher prices to the U.S. consumer,” said Cliff Corso, executive chairman of Insight North America, in an interview with MarketWatch.
The first cut in a decade
Speculators are growing increasingly confident the Federal Reserve will cut interest rates this year — marking the first rate cut in a more than decade — as the central bank reacts to increasing evidence of sluggish growth. Pricing for fed-fund futures show traders reflect market bets for at least one quarter-percentage point rate cut by the rate-setting Federal Open Market Committee by year-end.
“The bond-market is reflecting recession concerns, at this point,” Marvin Loh, global macro strategist at State Street, told MarketWatch.
See: After a sterling first-quarter GDP number, rate-cut bets gain steam. What gives?
To be sure, the recent speeches by Fed members reflect dissonance between market expectations and Fed policy makers. Kansas City Fed President Esther George and Fed vice chair for supervision Randal Quarles said the central bank was comfortable with a below-2% inflation rate as long as the economy remained healthy.
Loh said expectations now for policy easing in the future might seem out of step with the reality of a U.S. economy that remains strong, highlighted by economic growth in the first three months of 2019 hitting an annual rate at 3.2%.
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