Bond Yields Continue to Track Lower Driving Investors to Safety
With the global economy stagnating, a variety of fresh warning signs that suggest that Europe could enter a recession, and an economic slowdown from China that has sent shivers throughout emerging market economies, which have seen a decline in exports, investors are buying up bonds in droves.
â€œThis is one big trade,â€ said Gregory Faranello, head of U.S. rates at Amerivet Securities. â€œThe momentum and trends that are in place right now are pretty steadfast. Thereâ€™s nothing glaring to me that will change the dynamics right now. Weâ€™re in the latter stages of the summer months. Liquidity is definitely an issue. When you look at it globally right now, it encompasses a lot of different, diverse things. Today we have the headline from the U.K.; you have this ongoing trade war, and this global yield structure just continues to unfold.â€
Prices, which move inversely to yields, have been dropping for sometime. The benchmarkÂ 10-year TreasuryÂ note yield, which affects virtually everything from business loans to home mortgages, has been embracing three-year lows, reaching 1.45% Wednesday. Thatâ€™s below theÂ 2-yearÂ yield of 1.5%, and the move has been signaling recession, since the yield curve inverted recently.
Global economic instability is affecting bond yields as well. The 30-year Treasury bond yield also plummeted to an all-time low 1.91% Wednesday as U.S. rates followed a global move down, with the Japanese 10-year yield slumping to a fresh negative three-year low and the German 10-year bund yield sliding to its own record, minus-0.72%.
â€œThe disaster scenario is if yields fall dramatically from here,â€ said Michael Schumacher, director rates at Wells Fargo. â€œHypothetically, if the trade situation intensifies, if maybe Hong Kong goes badly and Brexit seems like it results in a hard exit â€¦ then what you probably get is a massive rally again in Treasurys.â€
While there are a number of factors driving rates lower, the trade war is a key component of the move.
â€œClearly, the trade war is such a big piece of this and it remains so incredibly unpredictable. Most people feel like itâ€™s elevated to such an extent that itâ€™s highly unlikely to get anywhere,â€ said Ralph Axel, rates strategist at Bank of America Merrill Lynch. He said people are wondering why China would sign a long-term deal with President Donald Trump ahead of the election.
Investors who want to allocate toward safety can gain exposure to Treasuries through various ETFs, such as theÂ iShares 7-10 Year Treasury Bond ETF (IEF)Â for an intermediate-term focus or something like theÂ iShares 20+ Year Treasury Bond ETF (TLT)Â for later-dated Treasuries exposure.
For more market trends, visitÂ ETF Trends.
Article by: Ian Young