By Sunny Oh
A day after U.S. stock benchmarks recorded their biggest one-day selloff in two years, investors are taking shelter in the deepest, most liquid haven asset in the world — U.S. Treasurys.
Fears the COVID-19 outbreak could delay a global economic recovery for longer than expected has drawn investors to government bonds. But broader, long-term factors like slow economic growth, tepid inflation expectations and not enough safe assets to go around have all contributed to the yield decline this year, analysts said.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -5.29% fell 4.9 basis points to trade at 1.328% on Tuesday, falling as low as 1.31% to surpass its previous record low of 1.325% set in June 2016, Tradeweb data show. This comes after the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -2.06% dropped to a new all-time low at the end of last week. Bond prices move in the opposite direction of yields.
The rally by Treasurys and other haven assets was boosted Tuesday as investors fled global equities and other assets viewed as risky. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.32% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.34% added to their selloff on Tuesday, a day after their biggest daily percentage loss in more than two years.
Yet only a few weeks ago, analysts were counting on the signing of the phase one U.S.-China trade deal to revive business investment and pave the way to a global cyclical rebound. But the selloff in stock markets across the world have frustrated those hopes.
Here’s a few reasons why the bond-market reversed course and could set a new all-time low soon.
The acceleration of haven flows reflect the creeping fear shared by even the most bullish of investors that the Chinese and global economy may not rebound on schedule. Investors have traditionally viewed the growth impact of health scares as fleeting, but the slowdown in the world’s second largest economy has challenged the optimistic assumptions of those gambling on strong returns for risk assets this year.
“The market is now pricing in a much slower pace of global growth that is consistent with around 2.5%, which is the widely accepted definition of a global recession,” said Joseph Brusuelas, chief economist at RSM, in an interview.
Supply chain disruptions after the outbreak have also raised fears that companies could struggle to meet consumer demand and deliver goods on time. Moreover, thinning sales and cash flows has even sparked worries small and medium enterprises not just in China but also in the U.S. could go underwater without support.
As coronavirus fears have taken hold, investors have sought shelter in government paper even as the income earned from holding such bonds declines. It helps that few money managers fear the corrosive impact of inflation on fixed-income returns, with price pressures staying muted despite tighter labor markets.
“In this type of risk-off environment, there’s a limited number of assets that works. Treasurys are one of them,” Marvin Loh, senior global markets strategist at State Street, told MarketWatch.