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

[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 per cent 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 2.23 per cent on Wednesday. Similar-maturity yields in Australia and New Zealand both dropped to records, while 10-year yields in Japan matched a three-year low of minus 0.1 per cent.

"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 in Sydney at Antares Capital, which oversees the equivalent of US$22 billion.

"I can see US 10-year yields heading toward 2 per cent if the pressure from the trade war continues."

Market voices on:

The renewed bout of risk aversion, brought on by US 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 a planned meeting between Mr 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 slid as much as three basis points on Wednesday to the lowest since September 2017, after falling five basis points Tuesday. The spread between US three-month and 10-year yields fell to as low as minus 12 basis points, the most negative since 2007.

Australia's 10-year bond yield slipped as much as five basis points to 1.48 per cent, dropping below the central bank's cash rate for the first time since 2015, while New Zealand's declined five basis points to 1.70 per cent. Japan's declined two basis points.

Bond auctions are further illustrating investor demand for fixed income. Australia's sale of A$3 billion (S$2.87 billion) of 2031 debt on Wednesday drew bids for A$10.8 billion, above the A$8.5 billion offered at a similar auction last year. A $40 billion offering of two-year Treasuries on Tuesday was awarded a basis point below the level in pre-auction trading.

"If policymakers just stand by and growth falls too sharply, then 2 per cent could happen" for US 10-year yields, Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings in Singapore. S&P modeling shows the probability of a US recession has risen to 25 per cent over the past few months from about 20 per cent, he said.

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."