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Wall Street Targets 1% Treasury Yields, or Well Below, on Virus

Wall Street Targets 1% Treasury Yields, or Well Below, on Virus
(Larry Metayer/Dreamstime)

Wednesday, 26 February 2020 09:36 AM

Now that 10-year Treasury yields have sunk to a record low, Wall Street analysts see plenty of scope for even lower rates -- possibly much lower, depending on the severity of the economic hit from the coronavirus.

The global borrowing benchmark touched 1.3055% Tuesday as investors sought safety in U.S. government debt amid plummeting stocks. The rate breached the previous all-time low set in 2016, and was little changed in early trading Wednesday. Thirty-year yields also fell to unprecedented levels, and traders ramped up bets that the Federal Reserve will ease policy by mid-year to support the economy.

Yields can continue sliding as long as investors buy safe assets to offset riskier holdings, said Jim Caron, fixed-income money manager at Morgan Stanley Investment Management. Bank of America Corp. strategists Paul Ciana and Bruno Braizinha see 1.25% on the the 10-year as a strong technical level and a likely next target. ING strategists are watching for the 5- and then 10-year rates to hit 1%, while FHN Financial’s Chris Low points to a worst-case scenario that may send the 10-year below 1%.

“The prognosis for US market rates is for a move to the 1% area,” ING strategists including Antoine Bouvet wrote in a Tuesday note. The five-year, now at 1.19%, will likely trade through 1% first, and the 10-year “will not be too far behind.”

Ten-year yields are down about 55 basis points this year. On top of the obvious haven bid, the bond market’s relentless rally has also been drawing fuel from futures trading. Gains in 10-year futures have accelerated since the expiry on Friday of options that had been giving dealers an impetus to sell into strength. With those hedging barriers gone, demand is emerging for fresh volatility bets and futures are more vulnerable to wild swings in either direction.

1.25% in Sight

Braizinha and Ciana see 1.25% as a “strong technical level” that can be reached relatively quickly on virus developments. They pinpointed that level based on an analysis of long-term price patterns related to changes in investor sentiment and psychology. It’s also where the curve would become so inverted that the Fed would be pushed by the market into cutting rates, according to Braizinha, citing empirical research.

But even under a “best-case” scenario -- in which the global spread of the virus slows, contagion in other countries is minimal and annualized global economic growth falls by a range of 1.25-1.75 percentage points in the first half -- the 10-year yield could sink to 1%-1.25% anyway in March or April, according to FHN’s Low.

The economist says he and his colleagues studied such things as economic growth patterns, trade flows and various scenarios of economies under lockdown to handicap where yields might go. In the less-alarming scenario, he says, the Fed would still cut rates by 50 basis points to 75 basis points across April and May, to preempt a possible downturn.

But under a “bad-case” scenario in which there’s severe disruption in the global supply chain and a significant loss of output in countries other than China, the 10-year yield could fall to between zero and 1% in the September-to-November period, Low says. The Fed could cut rates to between zero and 0.25%, and implement quantitative easing, with those policies staying in place into 2021, he said.

Low’s prediction comes as the U.S. Centers for Disease Control and Prevention warned Americans to prepare for a potential outbreak at home. Cases in South Korea continue to climb, while rising infections in Europe and the Middle East fanned concern of a worsening global outbreak.

While it may be hard to imagine U.S. yields sitting at zero, the experience in other economies suggests zero “is not necessarily as low as they can go,” Low said in a note.

Case in point: German 10-year debt yields about minus 0.5%.

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Now that 10-year Treasury yields have sunk to a record low, Wall Street analysts see plenty of scope for even lower rates -- possibly much lower, depending on the severity of the economic hit from the coronavirus.
wall street, bond, treasury, yields
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2020-36-26
Wednesday, 26 February 2020 09:36 AM
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