Frantic buying of Treasuries sees yield curve inside 1% for first time

Hong Kong

TREASURY yields tumbled, with the entire curve trading below 1 per cent for the first time in history. Markets are now pricing for the Federal Reserve to cut policy rates to 0 per cent in the coming months.

Panic ensued on Monday, with the latest leg of the blistering bond rally fuelled by an all-out price war among the world's largest crude producers. Risk assets plunged with S&P futures dropping 5 per cent to hit circuit breakers, while commodity currencies tumbled.

The spread of the coronavirus and its fallout on supply chains and consumer spending have seen a dramatic repricing of global interest-rate expectations in the past month. The jolt lower in oil from the price war will sap inflation, increasing pressure on the Fed to take rates to the lowest since the global financial crisis.

"The more I think about it, the more it makes sense to me that that the US cash rate will fall below zero some time very, very soon," said Chris Rands, portfolio manager at Nikko Asset Management in Sydney. "I wouldn't be surprised if the US tries negative rates, especially with the tailspin in oil now adding to the virus fears."

The stampede for Treasuries comes after a weekend dominated by crisis headlines including the oil price-war, plunging Chinese exports and Italy's virus-induced lockdown.

Adding to the sense of malaise, Japan posted its biggest economic contraction in more than five years, while France said its economy may barely expand.

After sitting on the sidelines for two days, investors piled into Treasuries when markets reopened, driving 10-year yields down 45 basis points to 0.31 per cent, while the 30-year fell to 0.70 per cent. The 2-year yield declined 23 basis points to 0.28 per cent.

"We know what the financial crisis looked like, the tech wreck, but this bond rally we're seeing is just unchartered waters," said Stephen Miller, adviser at GSFM, a unit of Canada's CI Financial Group. "A global recession is now a probability, not a possibility."

As European markets opened, 10-year bund yields fell to a record low of minus 0.85 per cent. The entire German curve is now trading under negative 0.55 per cent. The European Central Bank meets this week, with easing expectations ratcheting up.

Treasuries, the world's deepest pool of haven assets, had been rallying in the past three weeks as the virus wreaked havoc across the globe.

Federal Reserve Chairman Jerome Powell surprised markets last week with an emergency rate cut of 50 basis points, raising the spectre that the virus fallout will be longer and worse than anticipated.

"It's a dire situation," said David Choi, head of Australian macro-fixed income at Aberdeen Standard Investments in Sydney.

"Leading up to all this, markets have had developed a learned behavior of buying the dip because there was a Powell put - but this time around the Powell put is not going to fix the virus."

Markets are pricing almost 75 basis points of rate cuts by the Fed at the March meeting, with a return to the 0 per cent lower bound expected by the end of the year.

Some are speculating that the US central bank will deploy unconventional policies used to combat the global financial crisis. That's driving the larger moves in long-dated bonds.

As well as a 50-basis point cut this month, "there's almost nothing left but renewed QE - but even renewed QE can't push long rates much lower," Peter Cecchini, global chief market strategist at Cantor Fitzgerald, wrote in a note Monday.

Federal Reserve Bank of Boston President Eric Rosengren said on Friday that policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.

The rally extended into other markets across the Asia-Pacific. Japan's 10-year yield dropped as much as 5.5 basis points to minus 0.2 per cent, the lowest since October. Yields in Australia and New Zealand tumbled to new lows.

Money managers are expecting the Reserve Bank of Australia to turn to QE as soon as the middle the year, while bets are increasing for the Bank of Japan to ease this month.

"The market is panicking," said Shinji Hiramatsu, a senior investment manager at Sompo Japan Nipponkoa Asset Management in Tokyo.

"Position adjustment, loss-cut buying and all sorts of buying are emerging. Everybody's buying Treasuries." BLOOMBERG