A 10-Year Treasury Yield Below 2% Is Something Almost Nobody Saw Coming
20 June 2019 - 8:14PM
Dow Jones News
By Steven Russolillo and Daniel Kruger
A fresh scramble for U.S. government debt has driven the
benchmark 10-year yield back below 2%, a situation few economists
or investors foresaw a few months ago.
Yields that have hit multiyear lows reflect the difficulties
central bankers face in normalizing monetary policy after a decade
of unusually easy money. Many investors, economists and policy
makers had assumed that the Trump administration's tax cuts and
looser regulation would spur stronger growth and higher inflation
and, in turn, higher interest rates.
The opposite has played out this year. The falling 10-year yield
suggests the economy isn't humming along as strongly as previously
believed. The rate is a barometer that helps set borrowing costs
across the economy.
For investors, low rates often encourage moves into riskier,
higher-yielding investments such as corporate debt and stocks.
Falling U.S. yields also tend to weaken the dollar and give other
economies greater room to cut their own official interest
rates.
Falling yields have caught nearly everyone by surprise. In
January, none of the 69 economists surveyed by The Wall Street
Journal predicted yields would fall below 2.5% by June. The average
forecast was about 3%, indicating bonds would have a modest selloff
by now.
Instead, the Treasury yield, which moves inversely to prices,
was recently at 1.98%, the lowest since late 2016.
U.S.-China trade tensions, global growth concerns and falling
inflation expectations have prompted demand for safe-haven assets
such as U.S. Treasurys. The latest drop came after the Federal
Reserve kept its benchmark interest rate unchanged and signaled a
rate cut could come soon.
Much has changed this year. After the Fed raised rates four
times in 2018, it had at first signaled it would keep tightening
policy. That is one reason economists' yield forecasts started the
year so high.
Likewise, most investors in the futures markets started the year
forecasting policy rates would be unchanged at year's end,
according to the CME FedWatch tool. Now, the most popular forecast
calls for three rate cuts by December.
A measure of U.S. inflation expectations by the University of
Michigan fell this month to the lowest level in the 40 years the
question has been included in the survey.
Subdued inflation is supportive for bonds because it means less
risk to the purchasing power of a bond's fixed-interest and
principal payments.
"Yields are going to be lower for longer, inflation is going to
be lower for longer and growth is going to be lower for longer,"
said Colin Robertson, managing director for fixed income for
Northern Trust Asset Management.
As the Fed and the European Central Bank spell out their plans
to support growth and lower interest rates, it could increase
demand for Treasurys and other sovereign debt with positive yields
as investors adopt yield-chasing behavior, said Edward Al-Hussainy,
a government bond and currency strategist at Columbia Threadneedle
Investments.
Investors have piled in. Being long, or owning, U.S. Treasurys
was voted the most "crowded trade" for the first time this month in
Bank of America Merrill Lynch's fund-manager survey, which polled
230 money managers who collectively manage $645 billion in
assets.
The rally in government bonds is broad-based, with yields on
10-year debt in Germany, Japan, Holland, Switzerland and Denmark
among those that are in negative territory. Investors who buy new
bonds at such levels are effectively paying borrowers to hold their
money.
The bond market is often viewed as less flighty than the stock
market and perhaps a more reliable indicator of where the economy
is headed. The two are sending mixed signals: While Treasury yields
keep falling, stocks keep rallying, with the S&P 500 less than
1% away from its high.
The Journal's most recent survey of economists, published
earlier this month, on average forecast 10-year yields would finish
the year at 2.34%.
Several economists have revised their Treasury-yield forecasts
lower. Earlier this month, JPMorgan Chase & Co. cut its
year-end prediction for the 10-year Treasury yield to 1.75%, from
2.9% in March. Bank of America Corp., UBS Group AG, Goldman Sachs
Group Inc. and HSBC Holdings PLC have also slashed forecasts.
Write to Steven Russolillo at steven.russolillo@wsj.com and
Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
June 20, 2019 05:59 ET (09:59 GMT)
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