Treasury Yields Hit New Lows—and May Keep Falling
U.S. Treasury yields could continue to set record lows, as investors flee the latest wave of euro zone worries amid fears of global recession.
Treasury yields, which move counter to prices, hit new lows Monday as buyers rushed into the U.S. securities in a dash to safety in early trading.
By afternoon, rates steadied at higher levels, but only after 5- and 10-year notes, and the 30-year long bond all touched their lowest yields ever.
The 10-year’s prior low was 1.437 percent, hit on June 1 when May’s dreary jobs data spooked markets.
“The next big move is lower, not higher,” said David Ader, chief Treasury strategist at CRT Capital. “I’m thinking 1.15 percent 10-year notes,” he said.
The 10-year yield Monday fell to 1.398 percent, the first time ever below 1.40 percent. It was at 1.436 percent later in the afternoon.
The 30-year bond yield Monday, also hit a record, falling to 2.477 percent, breaking a December, 2008 low. The five-year fell to 0.538 percent, also a record.
Bank of America Merrill Lynch technical analysts said the break below historic lows could trigger a move to the 1.36 percent, 1.24 percent level, and then potentially even to 1.00 percent on a multi-month basis.
“You had some really bad news that was the trigger today, and we’re just going to be dealing with this for a while,” said Ward McCarthy, chief financial economist at Jefferies. “Until Europe firmly resolves something, and until the politicians in Washington address our fiscal situation in a meaningful way, we’re going to have fitful behavior like this.”
Across the Atlantic, yields moved higher on Spanish and Italian debt, spurred by fears that Spain needs a sovereign bailout, and that similar problems could come up for Italy. Reports that six Spanish regions could ask for aid helped push Spain’s 10-year above 7.5 percent.
Italian yields rose in sympathy, and its 10-year was at 6.4 percent. There were also concerns about Greece meeting its debt commitments, ahead of its meeting with EU and IMF officials Tuesday.
McCarthy said Congress is actually more of a factor than Europe because its inaction on expiring tax cuts and pending budget cuts has slowed business activity, and therefore growth.
“We lowered our third quarter and fourth quarter growth forecast to 1.5 and 1 percent because they’re not making efforts to address this. I don’t see things getting better.”
McCarthy had expected third quarter growth of 2 percent and fourth quarter of 2.5 percent.
“Our fiscal policy could take us off the cliff. They’re scheduled to recess Congress on Aug. 4 and there’s absolutely no meaningful effort at all to come up with an extension of the tax cuts. All they’re doing is posturing for the elections,” McCarthy said.
The fiscal cliff is the pending expiration of the Bush-era tax cuts Dec. 31, and then the automatic spending cuts that start to take effect Jan. 1. All told, by some estimates, that would be a more than $700 billion hit to the U.S. economy, if Congress does not act.
“We will go into negative (GDP) numbers if they don’t’ extend them at all. I think they will do something in the lame duck session, but I don’t know that,” he said.
Ader said he expects to see that 1.15 percent 10-year yield this year. “Before the end of the year, we’re going to get real fiscal cliff worries. Within the next couple of quarters, I think we’re going to have further issues with Europe and I think our own economy is going to slow down,” he said.
He also does not expect to see much impact from the Fed, if it decides to do more quantitative easing, as expected by traders. In past programs, the Fed purchased Treasury securities in an effort to drive down rates. But with rates so low, many are wondering what impact it might have.
Ader said the next QE round should be aimed at mortgages and should help the mortgage market. “It would not hurt Treasurys.
It’s not going to be a problem for us like it was in the past. It’s not going to help stocks, commodities, the inflationary trade. Not this time around,” he said. “…It’s fair to say the market is kind of jaundiced. You could say it’s a step or two ahead of the Fed.”
The Fed meets next week, but many traders see September as a more likely time for the Fed to act on any new program.
Ajay Rajadhyaksha, head of Barclays Rates and Securitized Products Research, said rates could be low for quite a while, and he expects to see a 1.25 percent 10-year yield in the third quarter before it moves slightly higher later in the year.
However, he does not expect to see it rise above 2 percent for another four to six quarters, noting one factor is the Fed’s commitment to keep rates extraordinarily low.
“I think the biggest driver is economic expectations coming down,” said Rajadhyaksha. “Europe plays a role but if Europe suddenly settles down, Id’ have a hard-time seeing the 10-year going to 2 percent.”
Rajadhyaksha also pointed to the fiscal cliff as an issue.
“I think it’s one of the reasons growth is trending lower,” he said.
He also added there is uncertainty about what Congress will be able to agree on.
“Over the medium term, you are going to have austerity in the United States be a drag on growth,” he said.
Europe will be a more immediate factor, and he thinks it will continue to drive the flight-to-quality trade.
“If you look at the impact Europe has on U.S. rates, you’re likely to see bigger impact it the next three months,” he said. “I think things are coming to a little bit more of a head, so there will be serious discussion of what’s going to happen in Greece, where Spanish yields go, where Italian yields go.”
“Nothing seems to be working in terms of confidence when it comes to Europe. The half-life of any new policy initiative seems to be smaller and smaller,” he added.
Rajadhyaksha said one factor that will continue to drive Treasury prices and depress yields is the buying by banks worldwide, as they add U.S. Treasurys as a high grade security to meet new global bank regulatory rules. The same rule should help bunds.
Investors shifting from other credit products may also drive more buyers into Treasurys, Ader said. “Now if we have some concerns with earnings and corporates in general, there’s been dramatic outperformance in investment grade. Now those guys are under pressure to neutralize,” Ader said, noting that would push more money into Treasurys.
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