Investor concern over US economic outlook sends 10-year yield below 2.5%
Joe Rennison in New York
The benchmark US Treasury yield hit its lowest level in more than a year on Thursday, as investors fretted about the economic outlook after the Federal Reserve predicted it would not raise interest rates this year.
The 10-year yield, one of the most important global interest rates, fell below 2.5 per cent for the first time since the start of 2018 before inching higher.
It marks the latest drop in a dramatic decline for the benchmark yield. It has fallen more than 70 basis points since its recent peak in November 2018, when concerns around global growth sent US markets into a tailspin during the fourth quarter.
The shift has narrowed the difference been three-month and 10-year Treasury yields to just 5 basis points — its lowest level since 2007. The difference is among the primary measures of the US yield curve used by the Fed as an indicator of the health of the US economy, with a tighter range seen as a sign of slowing growth.The Fed had already indicated a more dovish tilt early this year in a bid to calm volatile stock and bond prices. At the central bank’s meeting on Wednesday, policymakers also shifted their outlook for further monetary policy tightening, dialling back their expected number of interest rate increases this year from two to none.
The move has reignited fears among some investors that economic conditions are deteriorating.
“What the Fed did yesterday raises questions about just how weak global growth must be,” said Kristina Hooper, chief global market strategist at Invesco. “Markets are now far more concerned about the growth outlook and that’s being reflected in Treasury yields.”
Some investors fear the Fed could go even further and cut interest rates before the year is out. The probability, derived from futures markets, of a cut in interest rates this year has risen to 40 per cent, from just 25 per cent before the Fed’s announcement.
“Typically, the Fed is too optimistic, and so given that naive history you would think that there could be a cut in late 2019 and almost certainly multiple cuts in 2020,” said Guy LeBas, chief fixed-income strategist at Janney Capital Management.
The decline in Treasury yields also dragged European government bonds lower. These bonds have already been weighed down by slowing economic data and growing fears surrounding the outcome of the UK’s exit from the EU, with the deadline just days away.
German 10-year government bond yields moved 4 basis points lower on Thursday to 0.04 per cent, closing in on negative territory for the first time since late 2016.
US stock markets recovered from early losses, with the S&P 500 trading up 0.4 per cent in mid-morning trade. Bill Zox, chief investment officer for fixed income at Diamond Hill Capital Management, said the Fed had effectively removed itself from further influence on markets this year, which could reintroduce volatility to bond and stock prices.
“I think that the Fed has overcorrected,” he said. “They were too tight in December — it was appropriate for them to shift course — but I think they have gone too far now. You might actually see more volatility enter into markets as a result.”
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