Some US investors are girding themselves for the once inconceivable prospect that the 10-year Treasury yield could be headed towards zero, as this year’s giant rally in bonds shows few signs of easing.
In a world awash with roughly $17tn of negative-yielding government debt — meaning buyers are guaranteed to get back less than they paid, via interest and principal, if they hold to maturity — America’s government bond market has long offered refuge to investors seeking higher returns.
German government bonds maturing in 10 years now yield minus 0.70 per cent, while Japan’s 10-year debt yields minus 0.27 percent. In that context, the 1.5 percent yield on the 10-year Treasury looks attractive.
But roughly a month ago the 10year note was yielding about 2 percent. The tight timeframe of that 50 basis-point slides has caught investors by surprise, leading some to put the prospect of further heavy falls on their radars.
“We could see zero,” said Nick Maroutsos, the co-head of global
bonds at Janus Henderson in Newport Beach, California, noting that any sell-off in bonds so far, causing yields to rise, has been met with immediate buying. “The probability is increasing, particularly as we drop so rapidly.”
However, while he expects 10year yields to break 1 percent before long, he is more cautious on putting a timeframe on a move through zero. For one thing, he points out that the policy likely to turbocharge the move downwards — negative short-term interest rates from the US Federal Reserve — seems a very remote prospect.
“While central banks in Europe and Japan have put all their eggs in one basket to use negative interest rates to stimulate growth, [and] the Fed is watching closely . . . we’re not at the point yet where the US is going to fully embrace that unless they see some real-life concrete examples of it working,” Mr. Maroutsos said.
The European Central Bank’s deposit rate currently sits at minus 0.4 percent, having been set below zero since June 2014. Japan’s central bank adopted a negative benchmark interest rate in 2016, and it now charges commercial banks 0.1 percent interest for some of the reserves they keep on deposit.
In the face of gloomy global growth and the Us-china trade dispute, both the ECB and Bank of Japan have signalled a willingness to lean more heavily on this negative rate policy.
The US central bank has also left the door open for additional stimulus, but its target policy rate is well above zero, aiming at 2 to 2.25 percent. Moreover, the relative strength of the US economy means there is resistance to pulling too forcefully on this lever.
For these reasons Bill O’Donnell, a rates strategist at Citigroup, said that while the 10-year note was headed to zero, it could be some time before it reached this level.
“One thing that is very clear to me in the midst of all of this cacophony of headlines is that there is absolutely no indication that rates are set to rise from here,” he said. But, he added: “Right now stocks are still not far from their record highs, the labour market looks to be in really solid condition and the US economy is still doing fine.”
Steve Major, global head of fixed-income research at HSBC, has a similar view. “To jump from here to zero is a long way,” he cautioned.
