It’s all my fault. I go away for two days to tour colleges with my daughter, and global bond markets soar as everybody in the world decides to seek safety simultaneously.
Today’s pause has very little to do with my return to my desk. The rise in bond prices has been so rapid that bond buyers and traders have declared a pause as they try to figure out of their preference for fixed income assets has gone too far.For example, investors everywhere fled to the safety of the U.S. Treasury market. Yesterday the yield on the 10-year benchmark Treasury touched 2.35%, the lowest yield since December 2017. At that yield the Fed Funds Futures market is pricing in not just one-quarter point interest rate cut in 2019, but something like 30 basis points of rate cuts–a 25 basis points cut and more.
That’s well ahead of what the Fed talked about at its March meeting–one rate cut, maybe, and then most likely in 2020–so it only makes sense for the fixed income markets to pause.
The yield on the 10-year Treasury rose 3 basis points today to 2.39%.It’s not just U.S. Treasuries that are seeing a flood of cash, of course. The yield on the German 10-year bund deeper moved into negative territory–to 0.8% yesterday. The yield on the 2-year German bond fell to a negative 0.62%. (The two-year government bond in most markets is the one most sensitive to shifts in sentiment about interest rate moves. The U.S. 2-year note now yields 2.24%, well below the 2.39% on the 10-year Treasury and the 2.41% on the 90-day bill.)
Where we go from here depends on, first, what global central banks do. Today New Zealand’s central bank surprised markets by signaling that its next move would likely to an interest rate cut. A move like that just adds to the market conviction that “everybody” is cursing interest rates. Mario Draghi, the president of the European Central Bank, has said that the risk in the EuroZone is slow growth and that inflation remains under the bank’s target–if that sounds like a justification for lower rates for longer that’s because it is.
Other global central banks, especially in emerging markets, see the Federal Reserve’s shift toward rate cuts instead of rate hikes as giving them shelter to pursue their own interest rate cuts to bolster flagging economic growth. Before the Fed shift, these central banks had worried that getting too far behind the Fed on interest rate increases would lead to intolerable downward pressure on domestic currencies against the dollar. Now that fear has receded. I’d expect to see interest rate cuts from countries such as Brazil, South Africa, Malaysia, and Indonesia in order to support domestic economies that have slowed along with global trade.
