Federal Reserve’s gloomy outlook exacerbates concerns over the global economy
Robin Wigglesworth in New York
The amount of government debt with negative yields has vaulted back over the $10tn mark, after the Federal Reserve’s unexpectedly downbeat outlook exacerbated concerns over the health of the global economy and sent investors scurrying for the apparent safety of sovereign bonds.
Bond yields have sagged lower for much of 2019, as fixed-income investors have remained sceptical that growth will pick up again. With economic data still weak and inflation at bay, central banks have been forced to abandon moves to tighten monetary policy.
This month, the European Central Bank restarted a crisis-era bank lending programme, and last week the Fed shelved plans to raise interest rates this year — unexpectedly cautious moves that have raised questions whether officials see a downturn coming.
“It is puzzling why the Fed felt that it needed to be even more dovish last week than in January,” David Woo, a senior strategist at Bank of America Merrill Lynch noted. “Investors are starting to ask what the Fed might know about the economy that the market does not?”
Coupled with more underwhelming economic data, the central banks’ caution has poured fuel on a rally in safer, higher-rated government bonds, even pushing the 10-year German Bund yield back into negative territory. The total amount of debt trading with nominal yields below zero is $10.07tn, according to Bloomberg data, up from a low of $5.7tn in early 2018. The last time the total moved through the $10tn mark was September 2017.
Other key bond indices have moved higher. The Bloomberg Barclays Multiverse index, which tracks $55tn worth of debt, last week enjoyed its biggest five-day gains in over a year. That pushed the average yield on bonds in the index to 2.03 per cent – the lowest since January 2018.
Meanwhile, longer-term US government bond yields have dipped below short-term ones, an inversion of the “yield curve” that has historically been a useful predictor of economic recessions. On Friday, the 10-year Treasury yield fell below the yield on three-month T-bills, fanning concerns that the long post-crisis economic expansion is coming to an end. The spread between the three-month and ten-year instruments is the Fed’s preferred measure of the yield curve.
That sent global equities on Friday tumbling by the most since the turmoil in December. Many developed markets saw falls on Monday too, led by Japan and Hong Kong.
Some analysts have pointed out that the yield curve often inverts well before a recession, and the Fed itself has been at pains to stress that economic growth remains resilient. However, that is unlikely to comfort investors who remain on edge after the rough fourth quarter, according to Matt Maley, a strategist at Miller Tabak + Co.
“The problem with that thinking is that we don’t invest in recessions, we invest in stocks, and bear markets begin long before the economy falls into recession,” he said.
“Also, we don’t need a recession for the stock market to decline in a significant way. So even if we don’t have a bear market, it doesn’t mean we cannot see a good-sized decline in the stock market as the economy slows.”
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