Treasuries Rally to Cool With China Stimulus Seen, BNP Says
Benchmark yields have fallen 35 basis points this year to 1.57% as investors priced in slower global economic growth.
(Bloomberg) -- The virus-induced rally in U.S. Treasuries could be brief as China stimulus and a recovery in U.S. growth rein in demand, according to BNP Paribas SA.
Yields for the 10-year bond may drop to a 2016 low before rising as high as 1.95% in the next three months, said Shahid Ladha, head of G-10 rates strategy at BNP. While the coronavirus outbreak will hurt China’s economy, the rapid gains in Treasuries suggest that the market has gotten ahead of itself, he said.
“It’s gone quite far in the U.S. especially with broad U.S. risky assets looking up,” Ladha said at an interview in Singapore. Convexity hedges -- where investors seek to compensate for a drop in rates by buying longer-dated bonds -- may have exacerbated the fall in yields, he said.
Benchmark yields have fallen 35 basis points this year to 1.57% as investors priced in slower global economic growth and easing by central banks due to the coronavirus outbreak. The pace of the decline has stoked debate over how far the rally can go.
As the death toll mounts in China, measures to contain the virus have hurt retailers and shuttered factories. The People’s Bank of China has announced stimulus to counter the fallout, including providing special re-lending funds. Officials have stressed that there’s ample policy room to deal with a crisis.
READ: PBOC Prioritizing Economic Growth Over Debt Control
“The market will try at some point to look beyond onto the considerable investment and upside that comes after, as did happen in Hong Kong, China in 2003,” Ladha said, referring to the SARS outbreak. “You try to learn from history.”
Dovish Fed
Treasury 10-year yields fell to as low as 1.32% in 2016. TD Securities and J.P. Morgan Asset Management have predicted that subdued price pressures and dovish Federal Reserve policy may pave the way for further gains in the bonds.
But, Ladha noted that the strength of the U.S. economy and decent inflation levels are likely to limit the drop in yields. Data last week showed American employers ramped up hiring in January and wage gains rebounded, bolstering the case for the Fed to keep interest rates on hold for the rest of the year.
Here are some of Ladha’s other investment views:
- Firm favors local-currency Asian government bonds including Singapore, Thailand and China
- Asian central banks are poised for more easing, which will provide “some insulation” from the virus-induced economic slowdown
- Investors seeking hedges are better off selling expensive equities than buying “rich” Treasuries
- Rise in 10-year Treasury yields will likely be capped at around 2.25% this year amid global demand for positive-yielding debt
To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing, Nicholas Reynolds
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