Why investors should care about falling global bond yields and a flattening Treasurys curve

By Vivien Lou Chen

Bond rates worldwide have been on a steady, downward trend for months accompanied by flattening yield curves that suggest investors expect global economic growth to slow, inflation to moderate over the longer term, or both. The pattern is playing out in the U.S. and Australia, where 10-year yields have been inching closer to 1%, while the U.K.’s counterpart rate heads toward zero and those of France and Germany go further negative. That’s contributing to the flattening, or shrinking, of the spread between 10-year rates and shorter-dated ones, with Europe and Japan not far off from a yield-curve inversion that usually foreshadows a recession.Falling global yields and flatter curves are a turnabout from much of the past 12 months, when optimism about reopening economies led investors to price in post-pandemic recoveries. But now investor sentiment has shifted toward the view that the U.S. and other developed countries have likely already hit their peak levels of growth. That shift is occurring at the same time that ongoing bond buying by central banks — intended to support pandemic-damaged economies — keeps pushing rates down. “Since the delta variant entered the narrative around June, we’ve known that certain parts of the globe will go into lockdown, like China, and we know that’s going to lead to a deceleration in growth,” Ben Emons, head of global macro strategy at New York-based Medley Global Advisors, said via phone. At the same time, excess liquidity in Europe, the U.S. and China “is compressing rates,” he says. In the U.S., Australia, Canada and much of Europe, 10-year yields on government bonds have fallen by around 20 basis points or more in just the past month. That’s left rates in the U.S., /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.91% Y Australia, /zigman2/quotes/211347066/realtime BX:TMBMKAU-10Y +4.61% and Canadian /zigman2/quotes/211347096/realtime BX:TMBMKCA-10Y -1.64% in the vicinity of 1.22%, 1.15%, and 1.16%, respectively; the U.K. rate /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y -0.38% around 0.50%; and yields in Germany /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -2.18% and France /zigman2/quotes/211347162/realtime BX:TMBMKFR-10Y -0.86% at minus 0.50% and minus 0.16%, respectively.

See : What the world’s rising pile of negative-yielding debt means for U.S. Treasurys Whether it is U.S. banks flush with deposits and putting money to work in Treasuries, the European Central Bank buying more bonds that governments can issue, the People’s Bank of China regularly injecting cash, or the Bank of Japan controlling its entire bond market, “vast sums of liquidity globally are keeping rates lower than they would have been,” according to Emons. In a nutshell, the world’s ”emergency response to the pandemic is suppressing rates.”Meanwhile, spreads between 10- and 2-year rates in Japan, Europe, the U.S. and even Australia have generally flattened, or shrunk, in what’s regarded as a pessimistic sign on the global economic outlook.

In the U.S., Germany and Australia over the past month, bond-market curves are “bull flattening,” meaning long-end yields are falling faster than shorter-term rates. This occurs when there’s a flight to safety in bonds and/or reduced expectations on inflation in the long run. The global bull-flattening moves are “consistent with a market concerned about central banks pulling back too soon on support offered during the pandemic,” BMO Capital Markets strategist Ben Jeffery said via phone.Since June, for example, any hints that the Federal Reserve’s first rate increase might occur sooner than many expect have been met with a bull flattening in Treasuries, which is “a classic policy error response,” he said. The market is worried that the central bank will err by “tightening too quickly or sooner than appropriate, but is not necessarily calling for the Fed to ease: Just continue to be patient.”Recent U.S. inflation readings well above 2% have helped open the door to the notion of a Fed that might act too soon. On Wednesday, Fed Vice Chairman Richard Clarida said he could see himself supporting an announcement to taper bond purchases this year, if the economy evolves as he expects, and enough progress could be made on the central bank’s goals for policy makers to begin raising interest rates in early 2023. Read: Fed’s Clarida could support announcing slow-down in bond buying later this year; eyes early 2023 for interest-rate hikes Beyond the central-bank sphere, there’s another factor driving down yields: Investors have built up a “big wall of savings” during lockdowns in the past year that’s now being poured into government bonds for a lack of better safe options, says Carl Weinberg of High Frequency Economics in White Plains, New York. That’s pushing bond prices higher and yields — which move in the opposite direction — lower.“There’s a big wall of savings that has to go somewhere, so there’s been a continued stream into stock and bond markets,” Weinberg said via phone. “People pouring into bonds are looking for a place that’s safe, and they don’t care about return.”Lower yields end up punishing savers, while rewarding risk-takers who borrow, he said. And flatter curves reduce the incentives for banks to make longer-term loans like mortgages or car loans, according to Weinberg. Unlike many analysts, though, he doesn’t see low rates or shrinking spreads as a pessimistic sign for the economy, and says that “I’m not necessarily expecting a slowdown in growth.”

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