U.S. Yields Hurtle Toward Zero With Thin Market Stunning Traders
The moves came as stocks around the world plunged and futures pointed to another day of losses in U.S. equities.
(Bloomberg) -- Treasury yields plummeted to record lows Friday as concern about the global economic and financial impact of the coronavirus spurred demand for havens, while questions swirled about liquidity in the world’s biggest debt market.
U.S. securities rallied and long-bond rates notched their biggest intraday drop since 2009 as government debt around the world racked up further historic milestones Friday. At the short-end of the American yield curve traders amped up bets on further central bank easing this month. Other refuge assets also advanced, with the yen climbing and bund yields diving to unprecedented negative levels. A stronger-than-expected U.S. jobs report failed to dent the pessimistic tone.
“We expected the virus to have a big impact,” said Tony Farren at Mischler Financial Group. “But it has gone way beyond our wildest expectations. I thought last Friday was the blow-off top and then a few times this week before today, but now it’s beyond belief.”
The moves came as stocks around the world plunged. The number of coronavirus cases globally exceeded 100,000. Singapore warned of a global pandemic and Britain’s chief scientific adviser said a vaccine could take as long as 18 months to develop.
Bill Finan, senior managing trader at Columbia Threadneedle said he couldn’t remember seeing the Treasury futures market this thin and that this episode ranks with some of the more extreme liquidity crunches he’s seen. “Forget trading ultra bonds, nothing showing there,” he said.
Money markets showed some signs of stress with the so-called FRA/OIS spread -- seen by many as a proxy for banking sector risk -- widening to as much as 51 basis points. That was more than double its level from earlier this week. The measure subsequently slipped back to around 49, as of 2:27 p.m. in New York, but remains up dramatically on the week.
“We are staring at the abyss of a credit crunch,” said Kaspar Hense, a portfolio manager at BlueBay Asset Management, noting in particular the widening of FRA/OIS in the U.S. money market.
The five-year Treasury yield breached its 2012 low, dropping to a record low 0.4885%. The yield on 10-year debt -- which has fallen by more than half in just over two weeks -- dropped as much as 25 basis points to an unprecedented 0.6572%, before bouncing to around 0.74%.
The 30-year rate, meanwhile, plunged as much as 34 basis points Friday to 1.2036%, also a record low, flattening the yield curve. The last full-day move that was bigger than that occurred in the midst of the 2008 credit crisis. The last intraday move that was larger took place in 2009, the day the Federal Reserve announced an expansion of its large-scale asset purchase program. The long bond subsequently pared its move Friday, with the yield recovering to around 1.27%.
Outside the U.S., government debt markets are also being shaken. China’s 10-year rates fell to the lowest since the country was battling deflation in 2002. German yields hit record lows and those on short-dated U.K. debt neared 0% as the market braces for more stimulus from central banks.
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Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings, said investors are now discounting a return of quantitative easing by the Fed and an expansion in Bank of Japan asset purchases. And money markets are also on alert for the possibility that the European Central Bank could lower its deposit rate or boost asset purchases next week.
“What we are seeing is symptomatic of not enough positive-yielding, defensive assets within global fixed income,” said John Taylor, a money manager at AllianceBernstein. “Central banks are doing everything they can to provide stimulus, which can add fuel to the flames of the bond rally.”
The U.S. jobs report for February, released Friday, indicated the labor market was on especially solid footing before the spread of the coronavirus intensified. But investors largely looked past the indicator as risk aversion continued to grip markets.
The Fed earlier this week joined central bank peers in providing support to the economy and markets. It slashed its target by half a point at an emergency meeting to a range of 1.00% to 1.25%. But traders are betting they will have to do much more. Fed funds futures contracts now indicate that the U.S. central bank benchmark will drop to less than a quarter of a percentage point in the second half of this year. And more than half a point of additional easing is priced in for this month alone.
“The market’s focus is squarely on the growing likelihood of the Fed once again hitting the zero lower bound on short-term interest rates and restarting quantitative easing,” said Chris Jeffery, head of rates and inflation at Legal & General Investment Management. “With the number of coronavirus cases spiraling higher every day, it’s a brave investor who stands in front of that trend.”
Sidelined bank cash may also be adding fuel to the recent surge in the Treasury market, which this week alone has seen two intra-day drops of more than 20 basis points for the 10-year yield. Around $1.8 trillion, or about 10%, of U.S. commercial banks’ assets is in cash that hasn’t been lent out or invested, according to Federal Reserve data and FHN Financial Chief Economist Chris Low estimated that pile could more than double in the event of a recession brought on by the spreading coronavirus.
The trend in rates as been as inexorable as the spread of the coronavirus itself, with new waves of infections and markdowns in growth forecasts driving fresh inflows to risk-free securities. It’s driven the global supply of bonds with negative yields to $14.4 trillion, up by well over $3 trillion since mid-January, before the epidemic became apparent in central China.
It’s all been a dramatic showcase for the benefits of bonds as a hedge in portfolios, after that traditional allocation strategy faced questions less than two years ago. The Bloomberg Barclays Global Aggregate index of bonds has returned 3.3% since the year began, versus a loss of around 9% for the MSCI All Country World Index of stocks. Gold, another once-maligned hedge, is up 10%.
“I can make some exploding noises with my mouth, which about sums it up,” said Ranko Berich, head of market analysis at Monex Europe Ltd.
--With assistance from Vivien Lou Chen, John Ainger, Michael Hunter, Stephen Spratt and Ruth Carson.
To contact the reporters on this story: William Shaw in London at wshaw20@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net;Elizabeth Stanton in New York at estanton@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, Mark Tannenbaum
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