Treasuries Feel Global Pull of Sub-Zero Yields on Virus Concerns
(Bloomberg) -- Bond yields worldwide gravitated toward zero and below amid concern the spread of the coronavirus delta variant will derail the global economic recovery.
On Wednesday, the U.S. five-year real yield reached a record low, while the benchmark 10-year nominal yield hit its lowest level in five months after a weaker-than-expected report on company job growth before remarks from Federal Reserve official Richard Clarida helped spur a partial rebound.
Meanwhile, Italy’s two-year yield fell below the European Central Bank’s deposit rate of minus 0.5% for the first time and Japan’s 10-year bond yields declined to zero, a level last seen in December. Benchmark rates on Greek debt dropped to an all-time nadir, the entire German yield curve turned negative this week.
Bonds have rallied this week as a spike in virus infections worldwide spurred demand for safety. Government debt in the U.S., Europe and Japan has also been buoyed by expectations that major central banks will maintain accommodative policy despite signs inflation is quickening.
“It’s the coronavirus-induced uncertainty that has brought yields down” globally, said Makoto Yamashita, chief economist at AU Jibun Bank Corp. in Tokyo. While local investors may grow reluctant to buy bonds with yields at 0% or below, “they may shift to longer-dated debt instead for higher carry,” he said.
Treasury yields fell, with 10-year yields down as much as five basis points to 1.1258% in New York trading before bouncing back up to around 1.16% on the back of Clarida’s comments.
The five-year inflation-adjusted rate hit a record low on Wednesday, while the 10-year maturity dropped has already plumbed unprecedented levels.
The moves followed data that showed U.S. companies added far fewer jobs than expected in July, with payrolls posting the smallest gain in five months, according to ADP Research Institute. That potentially bodes ill for the official government jobs report this Friday. The current median forecast of analysts is for non-farm payrolls growth to have accelerated to 870,000 in July.
Clarida, meanwhile, said that the Fed is on track to begin increasing interest rates in 2023 if the economy performs as policy makers are projecting. The “necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” the vice chairman said.
In Europe, Italy’s two-year yield extended declines after ECB Governing Council member Martins Kazaks said the central bank’s September meeting would be much too early for a decision on whether to extend or phase out the pandemic bond-buying program.
The drop in Italian yields “is likely to mean investors increasingly look to extend maturity for yield enhancement,” Mizuho International Plc strategists including Peter Chatwell wrote in a note.
Kazaks’ comments also weighed on German 30-year yields, which dropped to as low as -0.063%, a six-month low. That kept the entire yield curve below zero for the first time since February.
In Japan, the benchmark 10-year yield dropped 1.5 basis points on Wednesday, extending declines from as high as 0.175% in February. The latest move comes as a catch-up after Tuesday’s trading session saw no trades in 10-year bonds for the first time since June 1, a sign the Bank of Japan’s yield-curve control continues to strangle market activity.
A BOJ bond-purchase operation on Wednesday drew fewer offers to sell one- to five-year tenors than the previous operation for the sector on July 21, indicating investors were reluctant to offload their holdings.
“The results of the BOJ’s bond-purchase operation have helped push the 10-year yield to zero,” said Keisuke Tsuruta, a strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. The results confirm the strong demand for bonds, he said.
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