Treasury Yields Fall to Lowest Level Since 2017 Amid Worries on Growth, Trade
May 23 2019 - 3:12PM
Dow Jones News
By Daniel Kruger
The yield on the benchmark 10-year Treasury note fell to its
lowest level since 2017, dragged down by growing investor concerns
that trade tensions between the U.S. and China could last longer
and strain growth more than previously thought.
The 10-year yield recently traded at 2.299%, according to
Tradeweb, down from 2.393% Wednesday. That is its lowest intraday
level since October 2017.
Yields, which fall as bond prices rise, slid early in the
session after surveys of purchasing managers in Europe suggested
weak demand for exports, a sign it could be difficult for the
region to climb out of its rut. Yields then extended their declines
after a pair of reports on housing and business activity in the
manufacturing and services sector suggested the U.S. economy could
be losing steam.
The moves sent the yield on the 10-year note below the yield on
the three-month Treasury bill for the first time since May 15,
raising concerns among some investors about the durability of the
economic expansion.
Investors watch the dispersion between yields on short- and
longer-term Treasurys, called the yield curve, because it is seen
as an important barometer of economic conditions. Shorter-term
yields tend to exceed longer-term ones prior to recessions, a
phenomenon known as an inverted yield curve.
Government-bond yields have retreated from multiyear highs hit
late last year as trade frictions between the U.S. and China have
dented hopes for a pickup in growth and inflation and the Federal
Reserve has signaled a cautious approach to raising interest
rates.
"Everybody is reassessing," said Jim Vogel, head of
interest-rate strategy at FTN Financial. It will take time for
investors to re-evaluate what has changed about their view of the
economy and how that underpins markets, and in the beginning of
that process "you have people reflexively flinch and move away from
risk," he said.
Bank of America Merrill Lynch Wednesday lowered its year-end
forecasts for sovereign-bond yields in countries including the
U.S., Germany and Australia, citing a loss in confidence that the
U.S. and China can resolve their disputes in the near future.
Several analysts said yields could move lower still. Some
investors sold bonds in recent months expecting a rapid end to the
trade conflict -- a wager that now looks overly optimistic, said
Krishna Memani, chief investment officer at OppenheimerFunds.
"All of us were foolish to think this would get resolved
quickly," Mr. Memani said. "We will be in this situation for quite
some time."
Falling expectations for inflation also have spurred the rally.
Muted inflation is good for the value of government bonds because
it preserves the purchasing power of the debts' fixed payments.
Investors' estimate of the average annual rate of inflation over
the next 10 years, measured by the difference between yields on
fixed-rate government debt and Treasury inflation-protected
securities, has fallen to about 1.7 percentage points from almost 2
percentage points one month ago. Investors are said to "break-even"
buying TIPS rather than fixed-coupon debt if inflation equals or
exceeds the yield difference between the securities.
The rise in tensions around the world isn't confined to China,
said Gemma Wright-Casparius, a senior fixed-income portfolio
manager at Vanguard Group. Investors also are assessing the impact
of increasingly hostile rhetoric between the U.S. and Iran,
continuing uncertainty about the U.K.'s plan to withdraw from the
European Union and signs of continued softening in the European
economy, she said.
"The whole kettle of geopolitical risk that had been put on the
back burner in the first quarter has come to the forefront," Ms.
Casparius said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
May 23, 2019 14:57 ET (18:57 GMT)
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