Traders signal deals in the ten-year Treasury Note Options pit on the Chicago Board of Trade.
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Bond rates are heading south, and there seems to be something stopping them for now.
The benchmark index on 10-year government bond yields, which affect everything from business loans to mortgages, has been squeezing three years low and was at 1.45% on Wednesday. It is below the 2-year rate of 1[ads1].5%, and the pace has signaled a recession.
The 30-year Treasury bond yield fell to a low of 1.91% on Wednesday, while interest rates around the world, moving at the opposite price, slipped to multi-year or record lows. US interest rates followed a global move lower, with the Japanese 10-year yield falling to a new negative three-year low and the German 10-year low yielding its own record, minus 0.72%.
"This is a great deal," said Gregory Faranello, chief of US pricing at Amerivet Securities. "The momentum and trends that are in place right now are pretty steady. There's nothing staring at me that will change the momentum right now. We're in the final stages of the summer months. Liquidity is definitely a problem. When you look at it globally right now now, it encompasses many different, different things. Today we have the headline from the UK; you have this ongoing trade war and this global return structure just keeps unfolding. "
Strategists said the bond market has been caught between a number of forces and is now a vortex that attracts investors who need to buy returns, which keeps getting lower as bond prices go higher. In recent days, investors have begun to believe that there is a very good chance that the US-China trade wars will continue for a very long time, and possibly even after the presidential election.
The global economy is declining, and increasingly, there are warning signs that it appears that Europe may be entering a recession. China's slowdown has sent a chill over emerging market economies, which has seen a decline in exports.
Then there is political uncertainty, which became even darker in the UK on Wednesday, after Prime Minister Boris Johnson pushed the reopening of Parliament to mid-October, limiting the amount of debate time and increasing the chances of a Brexit without a deal. Sterling fell and the 10-year yield fell to the lowest level in three years.
"The disaster scenario is whether returns fall dramatically from here," said Michael Schumacher, director of rates at Wells Fargo. "Hypothetically, if the trade situation intensifies, if maybe Hong Kong goes bad and Brexit seems like it results in a hard exit … then you're probably a massive meeting again in Treasurys."
"Anyone holding on to you a difficult prognosis in that scenario is throwing darts," he said. After 10-year returns broke through the psychologically significant 1.50% level on Tuesday, Schumacher said investors are looking for the next target on the record low record it reached in the weeks after the UK voted for Brexit, or to leave the European Union.
"People seem to be fixed at 1.35%," he said.
For investors, he said that a good place to hide can be in very short-term Treasurys. For example, the one-month Treasury yielded 2.06%, well above other securities. "Why be a hero?" he said.
Many strategists do not expect US bonds to follow the rest of the world at negative interest rates, but they admit it can happen. The other side of the falling interest rate history is that bond yields could quickly swell higher if, for example, there was significant progress in the trading situation. But strategists are skeptical that it will happen anytime soon.
"Obviously, the trade war is such a big part of it, and it remains so unpredictable. Most people feel it is elevated to such an extent that it is very unlikely to come any way," said Ralph Axel, Price Strategist in Bank of America Merrill Lynch. He said people wonder why China would sign a long-term deal with President Donald Trump ahead of the election.
Global interest rate sinkhole
Another key factor driving yields lower is the fact that more than $ 16 trillion in bonds around the world now has negative returns, and the US Treasury market has been a magnet for investors looking for returns , as well as security.
Axel said he has a 1.25% target for the 10-year, and he also expects the 30-year return to be at that level in the second quarter of next year.
Faranello said that the return moves lower because purchasing forces in several buyers that investors seem to lock in return. The question is whether the consumer, who has kept up the US economy, is starting to react to what scares the markets.
"If you are an American consumer, you see market volatility. You do not understand it. They see negative interest rates. You see the reverse interest rate curve that consumers do not understand, and this is a recession," Faranello said. "This may be self-fulfilling at some point, and the Fed will have to follow it."
Data over the next week can be important since it includes the monthly employment report next Friday and also ISM production and PMI, two indicators that have signaled a slowdown in the industry
"The yield curve tells us that we are looking at That is what the front end of the curve would indicate. The question is whether the yield curve will work out or will policy makers be able to support the data enough, "Faranello said. "I have no idea how it's going to play out, but there's really incredible fear and focus on a recession."
Central Banks Behind the Curve
Central banks around the world have been pushing down prices as economies have slowed down, and the worry is that they are at a bottom when defending their currencies. Another concern is that they do not have the ammunition they once had before the financial crisis, since so many took on extraordinary relief or already have super low prices. They also failed to do much in the decade since the financial crisis to raise inflation.
The Fed is broadly believed to reduce interest rates by a quarter point when it meets on September 17 and 18.
"I think the Fed needs to go 50 [basis points]. The Fed, I think, needs to change the tone globally. When they go to September, they have to hit it. They need to hit the 50th. They need to change the tone and the market's psychology. Right now we're in a vice, "Faranello said.
Even before the Fed meets, the European Central Bank will meet on September 12, and it is expected to take measures, including the already negative interest rate and possibly announce property purchases.
"We'll see what the ECB does. They have a lot of bad choices," Faranello said. "They will probably do several different things, but the market is not convinced that they have much power to turn the economy around now, and you have to start thinking about tax increases, but it is a sticky process when you have a [political] The big problem is that central banks globally are just out of bullets, just at the same time as things are moving south … You feel that the central bank has less power.