Treasury Yields Have Entered A Twilight Zone: Where Is The Bottom?

Update: Monday 1:00 p.m. EDT:

On Monday, the ten-year Treasury yield took a historic plunge, dropping 23.7% at 0.539% as of 1 p.m. At one point, the yield was as low as 0.4%. Bond yields have cratered along with crude oil futures and global equity markets as spooked investors moved into safe-haven assets in a frenzy.

Original story:

On Friday, the yield on the 10-year Treasury plunged to 0.706%, a new all-time closing low. Year-to-date the yield has plummeted 63% as investors spooked by the coronavirus bailed out of stocks and moved into safe-haven assets, especially U.S. government-backed bonds. At one point on Friday, the 10-year yield fell to an unheard of 0.6572%.

(When the price of a bond increases, its interest rate, or yield, declines.)

Some traders were stunned by these historic developments.

“We expected the virus to have a big impact,” said Tony Farren at Mischler Financial Group of Newport Beach, Cal. “But it has gone way beyond our wildest expectations. I thought last Friday was the blow-off top and then a few times this week before today, but now it’s beyond belief.”

Kaspar Hense, a portfolio manager at BlueBay Asset Management of London, declared: “We are staring at the abyss of a credit crunch.”

The 10-year yield is of particular importance since it serves as a benchmark for long-term mortgage rates and some other consumer debt.

Now bond yields are falling across the world to new lows as investors panic deepens.

“What we are seeing is symptomatic of not enough positive-yielding, defensive assets within global fixed income,” said John Taylor, a money manager at AllianceBernstein. “Central banks are doing everything they can to provide stimulus, which can add fuel to the flames of the bond rally.”

Scott Anderson, chief economist at Bank of the West, grimly warned: “The bond market is already pricing in a worst-case scenario -- a U.S. and global recession.”

While the U.S. Federal Reserve just enacted an emergency rate cut last Tuesday by slashing the Fed Funds Rate by 50 basis points to a range of 1.00% to 1.25%, many bond traders are expecting even further easing.

“The market’s focus is squarely on the growing likelihood of the Fed once again hitting the zero lower bound on short-term interest rates and restarting quantitative easing,” said Chris Jeffery, head of rates and inflation at Legal & General Investment Management. “With the number of coronavirus cases spiraling higher every day, it’s a brave investor who stands in front of that trend.”

But Victor Yong, an interest-rate strategist at United Overseas Bank in Singapore, said: “Looking at the recent [bond] price behavior, it is no longer about pricing in the Fed cut. This is a flight to quality first.”

Some analysts think the Fed’s benchmark rate could be lowered to just above zero – as it was for seven years following the 2008 global financial crisis.

Seth Carpenter, an economist at UBS, said if the Fed’s short-term rate does eventually hover at or near zero, it may stay there for years.

Jeffrey Gundlach, CEO of DoubleLine Capital, said he thinks the Fed will cut rates again at their next scheduled meeting in late March.

Might the 10-year yield actually sink to zero? Or even below zero?

“Zero percent yields are no barrier to any bond market in the developed world right now,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings. “It’s an insane market -- investors are re-defining the idea of risk distribution.”

Indeed, on a global basis, bonds with negative yields now total $14.4 trillion (mostly in Europe and Japan), up more than $3 trillion since mid-January, just prior to public knowledge of the epidemic in Wuhan, China.

“The race to zero [yield] is just flying off the handle,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “Trying to draw a line in the sand for 10-year yields when markets are slammed by fanatical hopes of Fed action and pandemic fears in turn may be a fool’s errand.”

Ian Lyngen, head of U.S. rates strategy with BMO Capital Markets, thinks yields might turn negative in the next few years.

“Given the global rates backdrop it is well within the realm of conceivable outcomes to have negative front-end yields,” he wrote.

But Lyngen doesn’t expect the Fed to push interest rates below zero as the European Central Bank has done – anytime soon.