The global bond market rally accelerated on Wednesday, as New Zealand’s central bank became the latest to sound a gloomy note on economic growth and traders ratcheted up bets that the Federal Reserve will start cutting interest rates this year.
The 10-year Treasury yield slipped another 6 basis points to 2.37 per cent, the lowest since 2017, as the US bond market heads towards its second-best monthly performance in more than a decade. Traders are now betting that there is almost an 80 per cent probability of the Fed trimming rates at least once this year — and a meaningful chance of several cuts.
March’s fixed-income rally has been broad-based, buoying the debt of virtually every highly rated government. Germany even sold 10-year bonds with a negative yield for the first time since the autumn of 2016 on Wednesday, highlighting how the move lower in government bond yields has begun to affect deals in the primary market.
Investors have become increasingly glum on the prospects for the global economy, with growth slowing in Asia, Europe and the US. The European Central Bank and the Fed have sounded decidedly more dovish lately, with the latter last week ditching plans to raise interest rates in 2019. These flickers of worry from policymakers have merely fanned the fears of investors.
“If you look across the globe, with almost total uniformity, you’ve had a similar degree of rallying in Treasuries, Gilts, Bunds and even in Australia,” said Scott Thiel, chief fixed-income strategist at BlackRock. “This is not an individual reaction to something idiosyncratic. It’s a broader risk-free rate rally.”
The gloom appears to be spreading. The Reserve Bank of New Zealand kept interest rates on hold earlier on Wednesday, but warned that the flagging world economy meant that it its next move is more likely to be loosening monetary policy than tightening.
That sent the 10-year New Zealand government bond yield tumbling by 11bp to a record low of 1.76 per cent, and was enough to ripple through other bond markets. “Almost all the central banks are dovish,” noted Salman Ahmed, chief investment strategist at Lombard Odier.
Underscoring the breadth of the surge in global bonds, the average yield of debt in the Bloomberg Barclays Multiverse index — which tracks more than $50tn of fixed income — has declined from a six-year high of 2.5 per cent late last year to 2 per cent.
This is a boon to many governments, which benefit from lower borrowing costs. The German government on Wednesday sold €2.4bn in 10-year paper with an average yield of minus 0.05 per cent, according to the German Finance Agency. In a sign of robust demand, the agency said it received 2.6 times more bids for the debt than it accepted.
While shorter-term bonds have previously priced with a negative yield, it was the first time Germany sold Bunds, which have maturities of at least 10 years, with a yield below zero since October 2016. The negative yield means that investors who bought at the auction and hold to maturity are guaranteed to sustain a loss.
However, the bond market’s gloominess has stirred concerns that the post-crisis global economic recovery is fizzling and could soon end. Longer-term US Treasury yields are now lower than short-term T-bill yields, an inversion of the usual shape of the “yield curve” that has historically proven to be a good omen for a recession.
“There’s definitely a growing concern about the global macroeconomic picture, particularly in Europe, and people are not well-positioned for it,” said John Taylor, co-head of European fixed income at AllianceBernstein. “Global central banks have completely shifted course. There is no concern about real inflation and central banks feel no pressure to hike.”
As a result, global equities have become more jittery lately. The FTSE All-World index fell 0.7 per cent on Wednesday, its fifth day of declines since the Fed’s meeting last week.
However, Mr Ahmed of Lombard Odier argued that the yield curve was too crude an indicator of recession, and said the recent market wobble was a buying opportunity — as long as growth stayed resilient and central banks remained dovish.
“If you look at the data from December to March, it’s not that bad, but the Fed has made a serious pivot. It is the most serious pivot from the Fed outside of recession years,” he said.
“If the data stabilises and the reaction function has shifted, then equities should rise because the business cycle is extended.”