The benchmark 10-year US Treasury yield sank below 2 per cent for the first time since 2016 on Thursday, a day after the Federal Reserve paved the way for interest rate cuts next month.
The bond market has rallied throughout 2019, as investors have grown increasingly concerned over the health of the global economy and bet that central banks would have to step in to prop up financial markets.
The renewal of trade tension between the US and its major trading partners — especially China — has exacerbated those fears, and sent government bond yields tumbling. This week, both the European Central Bank and the Fed acknowledged the risks, and indicated that they would probably ease monetary policy in the coming months.
“This week marks the beginning of a new stage in the cycle not only for the Fed, but also for the ECB and other emerging market central banks,” said Rick Rieder, chief investment officer for fixed income at BlackRock, the asset manager. “That shift will be characterised by easier policy and broad support for maintaining the global economic expansion, with or without global trade wars.”
The 10-year Treasury yield was 3 basis points lower on Thursday at 1.99 per cent, the first time it has slipped below 2 per cent since the US central bank accelerated interest rate increases in December 2016. The yield has fallen 70 bps since the start of this year.
“It’s certainly significant,” said Kristina Hooper, chief global market strategist at Invesco. “We cannot overlook it. There are a lot of headwinds facing economies. We have slowing growth. We have a trade situation that appears poised to deteriorate and we have an escalation in tensions between the US and Iran.”
The average yield of the Bloomberg Barclays Multiverse index — the broadest bond market benchmark, covering nearly $57tn of debt — has now tumbled to just 1.7 per cent, down from 2.5 per cent in November and approaching the all-time low of 1.4 per cent touched in 2016. The universe of negative-yielding debt ballooned to a new record of $12.5tn this week.
Global equities also rallied on Thursday, lifting the FTSE All-World by 0.8 per cent and putting it within reaching distance of the high touched in early May, before the resurgent trade war rattled investors. The S&P 500 was up 0.5 per cent at lunchtime in New York, having earlier set an all-time intraday high.
Nonetheless, some analysts cautioned that the underlying causes of the shift in tone from central banks — weakening economic growth and the risks of a debilitating global trade war — could still undercut the equity market rally.
“Although the central bank cavalry has arrived, relatively weak growth across major regions and the ongoing US-China trade conflict point to a volatile period ahead for macro assets,” Zach Pandl, a Goldman Sachs analyst, said in a note.
Some analysts remain concerned that the Fed could still decide against lowering interest rates at its July meeting, something that could trigger a market tantrum given how convinced many investors are that easier monetary policy is on the way. Futures prices imply the Fed will certainly cut rates next month and that there is a one in three chance of it will cut by 50 basis points — twice the normal increment.