Global Bond Market Sounds Shrillest Alarm Yet Over the Economy
Germany’s yield curve is now at its flattest since the financial crisis -- and yields across the world are slumping to fresh lows -- in a cacophony of signs that investors are growing increasingly pessimistic about the outlook for the world economy. Central banks from New Zealand to India have responded by surprising markets with their efforts to boost stimulus.
“This is all setting up for something very disruptive,” said Marc Ostwald, a global strategist at ADM Investor Services. “What exactly is difficult to enumerate, but the flattening will continue as long as people believe that bunds are a safe haven.”
In recent weeks, investors have faced off against a barrage of record-low yields as they have flocked to the remaining corners of the market where they can still eek out a positive return. Germany’s entire curve is already fully below 0%, while even the 10-year bonds of some of the riskiest nations in the euro area -- such as Spain and Portugal -- are getting precariously close to negative territory.
Investors are therefore seeking refuge in longer-dated bonds, betting that the European Central Bank will need to embark on quantitative easing again to counter a weakening economy. Shorter-dated bonds -- those more sensitive to interest-rate cuts -- have moved less, given the deposit rate is already deeply negative at -0.40%.
Globally too, the repercussions of the U.S.-China trade war are being felt. Ten-year Treasury yields are at the lowest level since 2016, with the premium over two-year bonds next to nothing -- a sign that an economic recession may be just months away.
Fears have grown this week that the dispute between U.S. and China over trade is spilling into a global currency war after the People’s Bank of China move to weaken the yuan to levels unseen since 2008. There are signs that the Swiss National Bank may be intervening to weaken the franc, while India, New Zealand and Thailand all cut interest rates.
The Federal Reserve may have to embark on an easing package of its own, according to Nomura Asset Management money manager Richard Hodges.
“The Fed will cut rates aggressively over next 12 months,” Hodges said. “I see little good news or evidence the US economy will improve and more suggesting it will fall further. How anyone can give an optimistic view on global economies is beyond me.”
German 30-year bond yields dropped as much as 10 basis points to -0.14%, narrowing the spread over those on two-year bonds to 71 basis points, the lowest level since 2008. The difference between two- and 10-year Treasuries is just 9 basis points.
The flattening is unlikely to be finished just yet given the ECB may have to come up with alternative easing measures to counter stalling inflation, such as yield-curve control, according to Danske Bank AS. That refers to a practice by the Bank of Japan, which limits the range yields can move.
“This is all supportive for flatteners,” said Jens Peter Sorensen, chief analyst at Danske. The trend will continue “unless they start some significant fiscal expansion in Germany, but what is the chance of that?”