Treasuries Rally, Euro Tumbles as Lockdown Fears Rattle Markets
Havens Rally as Fears Over Europe Lockdowns Resurface in Markets
(Bloomberg) --
The prospect of widespread Covid-19 lockdowns in Europe rattled financial markets, spurring a rally in Treasuries and sending haven currencies higher on speculation renewed outbreaks could deal a fresh blow to economic growth.
The euro slid to a 16-month low against the dollar as traders piled into safer assets after Austria announced a nationwide lockdown starting on Monday. Germany’s health minister refused to rule out closures in the country, weighing on investor expectations for a post-pandemic recovery.
The moves pared slightly after the German Foreign Minister Heiko Maas said in an interview with Bild that there “was no discussion over a comprehensive lockdown.”
It “feels like we’ve had a break from the Covid narrative but that is definitely coming back into play,” said Zachary Griffiths, a strategist at Wells Fargo Securities. But he added that “downside in G-10 government bond yields is at least somewhat limited given the global inflation backdrop and relatively hawkish shift in central bank policy.”
Treasuries rallied across most maturities. While securities in the belly initially rallied the most, longer-dated debt proceeded to outperform, flattening the curve, after comments from Federal Reserve officials Richard Clarida and Christopher Waller around the potential for faster asset-purchase tapering.
Covid concerns saw traders push out expectations for the Federal Reserve’s first interest-rate hike, but the comments from the board members helped spur a reversal of that move.
The yield on five-year U.S. debt, which is linked to views for policy rates over that horizon, dropped as much as eight basis points to as low as 1.14% before paring its decline to around two basis points.
The euro sank to the lowest against the dollar since July 2020. The common currency also tumbled to a more than six-year low against the Swiss franc.
The Japanese yen outperformed Group-of-10 peers on Friday and a gauge of the dollar’s strength advanced. In emerging markets, the Turkish lira reversed earlier gains and weakened beyond 11 per dollar, edging toward a record low.
U.K. government bonds were among the biggest gainers in debt markets, while German bonds also advanced. The Stoxx Europe 600 Index dropped.
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The darkening outlook is a reality check for markets that have been more focused on the risk of accelerating inflation and overheating growth than a resurgence of Covid-19.
Money markets have started pushing out expectations for policy tightening in some regions, with traders pushing back wagers on a rise in the European Central Bank’s interest rate further into 2023.
“Markets are progressively realizing and acknowledging that the picture is worsening, especially across the eurozone,” said Roberto Mialich, G-10 FX strategist at UniCredit Bank AG. “Some profit taking and position paring had emerged yesterday, but today Covid-19 concerns are prevailing.”
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