Treasury 10-Year Yield Slides Below 2% to Lead Global Decline
The Fed scrapped its use of “patient” in describing its approach to policy changes.
(Bloomberg) -- Treasuries led a global bond rally, with 10-year yields dropping below 2% for the first time since November 2016 as expectations grow that major central banks will ease policy.
The U.S. 10-year yield slid as much as five basis points to 1.9719% after the Federal Reserve signaled it was ready to cut interest rates. Japan’s benchmark yield dropped to minus 0.185%, near the bottom of the central bank’s targeted range after Governor Haruhiko Kuroda suggested policy makers won’t step in to prevent further declines. Similar rates in Germany fell deeper into the negative, approaching a record low reached earlier this week.
The Fed on Wednesday scrapped its use of “patient” in describing its approach to policy, offering support for bond bulls who argue that the U.S.-China trade war will sap growth momentum. The dovish tilt came after European Central Bank President Mario Draghi signaled he’s ready to add monetary stimulus.
“You’ve got a Fed that’s now changed its language and we’re on a path where there’s going to be rate cuts ahead,” said Shyam Devani, senior technical strategist at Citigroup Inc. in Singapore. “Whether it’s two or three times, it’s hard to say -- but there will be cuts.”
The Treasury 10-year yield has fallen more than 70 basis points this year as the U.S.-China trade war took its toll on the global economy. Calls for a rate cut are growing with Pacific Investment Management Co. forecasting a 50-basis-point reduction in July.
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France and Spain sold debt at all-time low yields Thursday, joining euro-area nations from Germany and Portugal to Ireland that borrowed at record-low costs in the past two weeks. Bonds in Australia joined the rally, with 10-year yields falling as much as seven basis points to a record 1.271%. Similar-tenor New Zealand yields slid to an all-time-low 1.51%.
“As yields head lower, investors could be tempted to lower their allocation to fixed income -- but we’d caution them against that,” Rachel O’Connor, portfolio manager at Vanguard Group Inc. said at a Bloomberg investment forum in Sydney Thursday. “Given the high level of uncertainties in markets at the moment, we’d be encouraging investors to think long term.”
With the Fed and ECB mulling easing, that’s raising expectations of other central banks also adding to stimulus. It’s “not unrealistic” to expect another rate cut in Australia, the nation’s central bank chief Philip Lowe said in a speech Thursday, after policy makers lowered their benchmark for the first time in three years this month.
BOJ Comfort
BOJ Governor Kuroda indicated he was comfortable with the recent slide in the 10-year bond yield, after the central bank kept its policy unchanged.
“There is no need to be extremely and strictly mindful about the concrete range of the rate,” he said during a news conference. “It’s appropriate to deal with it with some flexibility.”
Still, with U.S. President Donald Trump and Chinese leader Xi Jinping planning to meet next week at the Group-of-20 gathering, some investors are betting the two nations will eventually reach a trade deal.
“There are still people out there who are seeing Treasury yields as being too low given the possibility of the U.S. resuming trade talks with China,” said Naoichi Kanaoka, a senior strategist at Mizuho Securities Co. in Tokyo. “However, if the Fed reduces rates because of low inflation, then it would be full-swing policy easing rather than a preemptive cut.”
The Fed on Wednesday lowered its inflation forecasts. Futures are now signaling four rate cuts before the end of next year, with one at the July 30-31 meeting fully priced in.
The prospect of lower rates has prompted some investors to move further out along the yield curve, with 30-year yields falling as much as six basis points to 2.48% on Thursday, the lowest since October 2016.
“This will be the start of a rate-cutting cycle, not a one- or two-off cut in isolation,” Bob Michele, head of global fixed income at JPMorgan Asset Management in New York, wrote in a research note.
--With assistance from Stephen Spratt and Toru Fujioka.
To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Masaki Kondo in Tokyo at mkondo3@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Anil Varma
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