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Global Bond Yields Hit Multiyear Lows (#GotBitcoin?)

Investors increasingly concerned the long postcrisis expansion could be nearing an end. Global Bond Yields Hit Multiyear Lows (#GotBitcoin?)

Global Bond Yields Hit Multiyear Lows (#GotBitcoin?)

Government bond yields around the world plumbed new multiyear lows Tuesday, a sign of growing investor worries that global economic growth is poised to weaken.

The yield on the benchmark 10-year U.S. Treasury note, a key reference rate that helps set borrowing costs for everything from student loans to mortgages, traded at a recent 2.273%, according to Tradeweb, on track to settle at a fresh 19-month low. The yield on the 10-year German bund touched its lowest level since July 2016. Yields fall as bond prices rise.

Underscoring investors’ concerns about the economy, the bond rally pushed the 10-year yield further below the yield on the three-month Treasury bill. Investors watch the dispersion between yields on short- and longer-term Treasurys—called the yield curve—because shorter-term yields tend to exceed longer-term ones before recessions. That has happened several times this year; it is a phenomenon known as an inverted yield curve.

Tepid economic data, geopolitical tensions and signs of caution from the Federal Reserve have dragged yields down from multiyear highs above 3% reached late last year, raising fears that the long postcrisis expansion could be nearing an end. While few see an imminent recession, many investors worry that the impact of Trump administration tax cuts is fading and companies are poised to cut back on spending, removing key pillars of support for major U.S. stock indexes.

Though stocks remain near records, they’ve retreated recently, with the Dow Jones Industrial Average falling for five straight weeks to notch its longest string of weekly declines since June 2011. Shares of utilities and real-estate companies, considered bond proxies because they tend to pay hefty dividends, have climbed. U.S. oil prices have fallen almost 8% from their 2019 highs. And corporate bond yields have fallen at a slower rate than those on Treasurys, a sign of investors’ caution.

Some are now increasingly wagering that the Fed could cut interest rates to try to prolong the expansion. Treasury notes maturing from two to seven years are all trading below the 2.25% lower range of the federal-funds rate, a development analysts say suggests that investors are betting that the fed-funds rate will fall.

“Recession fears are here and now, and it’s getting priced into the [Treasury] market,” said Priya Misra, head of interest-rate strategy at TD Securities.

On Tuesday, the possibility that Italy could violate the European Union’s fiscal limits sent Italian yields higher and drove the yield on the 10-year German bund further into negative territory, where it touched negative 0.163%, its lowest level since June 2016.

Negative yields are generally considered a sign of growth fears, and analysts worry they could make it more difficult for developed economies to revive growth in a recession. The European Central Bank’s deposit rate is currently minus 0.4%, and policy makers this year ended bond purchases that were intended to boost growth and inflation.

The slide in global bond yields has dented many investors’ hopes that the global economy could become less reliant on central banks’ easy-money policies to sustain. Many hoped recent tax cuts would break the U.S. out of a long period of slow growth and low interest rates. Now, some wonder if the Fed raised rates too quickly when tax cuts boosted growth in recent quarters.

“It seems in hindsight that the stimulative effects of the tax cuts were temporary and may have masked how tight monetary policy was getting,” said Thomas Graff, who manages bond portfolios at Brown Advisory.

Economic anxieties have helped push up the average extra yield, or spread, that investors demand to hold corporate bonds over U.S. Treasurys—though spreads are still well below where they were at the start of the year when investors feared the Fed would keep raising rates.

Spreads on longer-maturity bonds have generally increased a little more than shorter-maturity debt, reflecting the risks of waiting longer for repayment. An Anheuser-Busch InBev SA 4.75% bond due in 2058 traded Tuesday with a 2.15 percentage-point spread, according to MarketAxess. That was up from 1.93 percentage points at the end of last month, though down from 2.54 percentage points at the end of last year.

The rising premium for holding riskier debt led Mark MacQueen, who manages bond portfolios at Sage Advisory, to reduce his holdings of corporate bonds, buying Treasurys and mortgage bonds in their place.

“People are coming to terms with the trade war and the impact it could possibly have,” Mr. MacQueen said. “Political uncertainty is creating a situation where CEOs and CFOs don’t know what to do,” leading to less investment in plants and equipment and slower growth.

At the same time, some investors have seen low U.S. rates as a positive development for stocks. Low bond yields tend to increase the appeal of riskier assets like stocks, while supporting business and consumer borrowing.

Some analysts said yields are likely to rebound from their recent lows. “Investors tend to catastrophize” and bet on worst-case-scenarios, said Brian Jacobsen, a multiasset strategist at Wells Fargo Asset Management. He’s betting that yields will be higher in the next three to six months, despite recent softening economic data.

“It’s not great but we think it’s not going to be bad enough to induce a recession or lead the Fed to cut rates,” he said.


Updated: 5-29-2019

U.S. Stocks, Treasury Yields Fall Further Amid Trade Jitters 

Fears that U.S.-China tariff dispute will add pressure on already slowing world economy have rocked markets lately.

Stocks around the world and commodities slid again Wednesday, as worries about slowing economic growth spurred a fresh retreat from riskier investments.

The Dow Jones Industrial Average fell 360 points, or 1.4%, to 24988. The S&P 500 dropped 1.1%, with each of its 11 sectors dropping. The broad equity gauge was on track for its lowest close since mid-March and was nearly 6% below its April 30 record. The tech-laden Nasdaq Composite declined 1.1%.

The yield on the benchmark 10-year U.S. Treasury note, which is tied to everything from mortgage rates to student debt, also extended a recent slide, dropping to 2.226%, according to Tradeweb, from 2.268% a day earlier. Tuesday’s close was its lowest settle since September 2017. Bond yields fall as prices rise and have dropped with investors seeking safety in Treasurys lately.

Fears that a drawn-out U.S.-China tariff dispute will add pressure on an already slowing world economy have rocked markets lately. President Trump indicated Monday that a near-term deal between the two sides is unlikely, and economic data pointing to weakness around the globe has added to growth concerns in recent days.

Reports in Chinese media outlets Wednesday that China could cut exports of rare-earth metals critical to everything from electronics and military equipment were the latest trigger for trade-related volatility, investors said.

“The industrial side of the world is still slowing, and that’s concerning,” said Paul Zemsky, chief investment officer of multiasset strategies and solutions at Voya Investment Management. “While I think the U.S. will continue to plow through, the rest of the world becomes more questionable.”

Mr. Zemsky said the firm has lowered the total amount of risk in its portfolios in recent months.

Data Wednesday showed German jobless claims rose unexpectedly in May, according to data from the Federal Employment Agency, fueling fresh concerns about the health of Europe’s largest economy.

Commodities that are the building blocks of construction and manufacturing slipped Wednesday, the latest example of demand concerns hurting growth-sensitive materials. U.S. crude-oil prices fell 3%, extending a recent stretch of volatility amid rising stockpiles, while copper futures fell 1.2%.

Both commodities are down 10% or more from their 2019 peaks, a warning sign to those who use materials as a gauge of momentum in the world economy.

Their recent declines also signal concerns that purchases by businesses will slow as the U.S.-China tariff fight continues.

“Companies are just going to use up their inventories a bit more before reordering these new inputs to production,” Mr. Zemsky said.

Analysts were looking ahead to a second reading of first-quarter U.S. economy growth, scheduled for Thursday. The first reading showed gross domestic product rose at a 3.2% annual rate, even with growth in consumer and business spending slowing.

Friday consumer-spending figures from April could also shift expectations for the U.S. economy, after industrial production and retail sales for that month were weaker than expected.

Despite strength in the U.S. labor market, some analysts expect weakness overseas to eventually spread as tariffs escalate, threatening the nearly 10-year old economic expansion.

The trade dispute “has caused the economy to slow and is going to continue to cause the economy to slow,” said Chris Cordaro, chief investment officer at RegentAtlantic.

In one sign of growing anxiety about the health of the economy, traders have lifted bets that the Federal Reserve will lower interest rates later this year. Federal-funds futures show the market pricing in a 86% chance the Fed will cut rates at least once in 2019, up from 64% a month ago, CME Group data show.

The Fed’s patient stance with rates is one reason some analysts are still optimistic stocks can avoid a deeper slide, such as the one that nearly ended the S&P 500’s bull-market run late last year.

“If interest rates are declining again, the relative expected return of stocks versus bonds keeps getting more attractive,” Mr. Cordaro said, adding that the firm has recently maintained its allocation to stocks.

Elsewhere, the Stoxx Europe 600 fell 1.5%.

In Asia, Korea’s Kospi closed 1.2% lower, hitting a nearly five-month low, while Japan’s Nikkei Stock Average fell 1.2%. The Shanghai Composite inched up 0.2%.


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