Treasuries at 2% in sight as trade war spurs global bond rally

The protracted US-China trade war is affecting the treasuries and global bond markets. (AFP pic)

SINGAPORE: Treasuries are in the vanguard of a bull run in global bonds, bringing into sight the prospect of benchmark 10-year yields dropping to 2% for the first time since late 2016.

Escalating US-China trade tensions and faltering global growth have seen US 10-year yields tumble almost 40 basis points since mid-April to as low as 2.24% on Wednesday. Similar-maturity yields in Australia and New Zealand both dropped to records in early Asian trading.

“The overarching theme of slower global growth, inflation not hitting the mark of central bank targets, and the uncertainty of a protracted trade war are all contributing to that rally,” said Tano Pelosi, portfolio manager at Antares Capital in Sydney, which oversees the equivalent of US$22 billion. “I can see US 10-year yields heading toward 2% if the pressure from the trade war continues.”

The renewed bout of risk aversion, brought on by President Donald Trump’s comment that a deal with China isn’t imminent and tensions between Italy and the European Union, reflects increasing bets major central banks will cut rates to revive growth. Traders are now focusing on an expected meeting between Trump and Chinese President Xi Jinping at a Group-of-20 summit in June, even as recent rhetoric from both sides indicates a hardening of positions.

Treasury 10-year yields fell as much as three basis points Wednesday to the lowest since September 2017, after sliding five basis points Tuesday. Australia’s 10-year yield slipped five basis points to 1.49%, dropping below the central bank’s cash rate for the first time since 2015. New Zealand’s declined five basis points to 1.70%.

Aussie bond yields drop below RBA cash rate

The spread between US three-month and 10-year yields fell to as low as minus 12 basis points, the most negative since 2007.

An Australian government bond sale for A$3 billion (US$2.1 billion) of 2031 debt was met with strong demand Wednesday despite record-low yields on offer. Investors submitted bids for A$10.8 billion, above the A$8.5 billion offered at a similar sale last year. That came after a A$40 billion auction of two-year Treasuries on Tuesday resulted in the lowest yield since January 2018.

Fed funds futures are now fully pricing in three rate cuts by the end of next year. Markets are also signaling two to three moves by the Reserve Bank of Australia amid concern Chinese demand for commodities is weakening.

“If the Fed cuts, will they cut by 25 basis points?” said Rajeev De Mello, chief investment officer at Bank of Singapore Ltd., whose base case remains that the US and China will come to a compromise. “Unlikely, they probably will cut by 50 basis points, and that’s what we’re starting to see priced into markets.”