The entire yield curve for U.S. bonds fell below 1% for the first time in history after an all-out price war between the world’s biggest oil exporters triggered an unprecedented global bond rally.
U.S. Treasury yields plunged, with the rate on 30-year bonds diving as much as 59 basis points, as rising expectations the Federal Reserve will cut policy rates to 0% in the coming months drove investors to reach to longer maturities for yield. U.K. government bond yields tumbled below zero for the first time, Germany’s two-year bonds were close to a record, and rates in Australia and New Zealand fell to new lows.
The spread of the coronavirus and its fallout on supply chains and consumer spending have seen a dramatic repricing of global interest-rate expectations in the past month. The jolt lower in oil from the price war will sap inflation, increasing pressure on the Fed to take rates to the lowest since the global financial crisis.
“The more I think about it, the more it makes sense to me that that the U.S. cash rate will fall below zero some time very, very soon,” said Chris Rands, portfolio manager at Nikko Asset Management Ltd. in Sydney. “I wouldn’t be surprised if the U.S. tries negative rates, especially with the tailspin in oil now adding to the virus fears.”
The stampede for Treasuries comes after a weekend dominated by crisis headlines including the oil price-war, plunging Chinese exports and Italy’s virus-induced lockdown. Adding to the sense of malaise, Japan posted its biggest economic contraction in more than five years, while France said its economy may barely expand.
Risk assets plunged with S&P futures dropping about 5% to hit circuit breakers, and European stocks plunged by the most since 2016, putting the STOXX Europe 600 Index on course for a bear market. Commodity-linked currencies weakened, with Norway’s krone and Canada’s dollar falling at least 1% against the U.S. dollar. Italian bonds plunged, sending the yield on 10-year debt to 1.23%.
Meanwhile, the yen and the euro strengthened. And the dollar, which suffered its worst week in two years, was up slightly, as soaring demand for U.S. Treasuries canceled out concerns that more Fed cuts would hurt the greenback’s appeal. The dollar has an edge over its peers by being the world’s reserve currency of choice.
On a Tear
Treasuries, the world’s deepest pool of haven assets, had been rallying in the past few weeks as the virus wreaked havoc across the globe. Federal Reserve Chairman Jerome Powell surprised markets last week with an emergency rate cut of 50 basis points, raising the specter that the virus fallout will be longer and worse than anticipated.
Bad Old Days
The yield on 10-year bonds dropped as much as 45 basis points to 0.31%, before settling at 0.5% as of 9:30 a.m. in London. Most of the German curve is now trading under negative 0.55%, which, together with the euro’s advance, may give the European Central Bank food for thought when it decides on interest rates this week.
“We know what the financial crisis looked like, the tech wreck, but this bond rally we’re seeing is just unchartered waters,” said Stephen Miller, adviser at GSFM, a unit of Canada’s CI Financial Group. “A global recession is now a probability, not a possibility.”
Central Bank Action
Markets are pricing almost 75 basis points of rate cuts by the Fed at the March meeting, with a return to the 0% lower bound expected by the end of the year. Some are speculating that the U.S. central bank will deploy unconventional policies used to combat the global financial crisis. That’s driving the larger moves in long-dated bonds.
Federal Reserve Bank of Boston President Eric Rosengren said Friday that policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.
Money managers are expecting the Reserve Bank of Australia to turn to QE as soon as the middle the year, while bets are increasing for the Bank of Japan to ease this month.
“The market is panicking,” said Shinji Hiramatsu, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co. in Tokyo. “Position adjustment, loss-cut buying and all sorts of buying are emerging. Everybody’s buying Treasuries.”