Wherever you
look in developed markets, sovereign bond yields are at their lowest levels in
years as traders ratchet up bets that major central banks will be easing.
Yields in
Australia and New Zealand dropped to record lows after a closely watched part
of the U.S. curve inverted Friday as investors wager that the Federal Reserve
will need to cut rates. Trading volumes in Treasury futures were double the
norm during Asian trading, while Japan's 10-year yields fell to the lowest
since 2016.
"Bond
markets globally, along with dovish central banks, have been telling us a
slowdown is on the way," said Jeffrey Halley, senior market analyst at
Oanda Corp. in Singapore. "Some parts of the world will be better equipped
than others to handle this. The U.S. can at least cut rates and apply monetary
tools, while things could be worse for Europe and Japan, where they
cannot."
Treasuries have led a global debt
rally amid bets that a rate-cutting cycle is coming. On Friday, the yield on
10-year notes fell below the rate on three-month U.S. bills for the first time
since 2007 amid reports showing economic weakness in the U.S., France and
Germany.
Money markets are pricing around a 90%
chance that the Federal Reserve will cut rates by 25 basis points by December,
followed by another reduction in September 2020. This comes after the central
bank projected no hikes this year at its policy meeting last week.
It's difficult to see "strong
inflationary pressures" in the economy, Chicago Fed President Charles
Evans said Monday in Hong Kong, adding that the central bank will be monitoring
data very closely.
Open interest, a measure of
outstanding positions across Treasury bond futures, jumped Friday as the yields
on the 10-year cash bond dropped 10 basis points to 2.44%. Hedge funds and
other speculators have also cut shorts in 10-year futures after holding record
positions as recently as September, according to the latest Commodity Futures
Trading Commission data.
"Data is deteriorating
globally," said Tano Pelosi, portfolio manager at Antares Capital in
Sydney. "It's very unlikely that the Fed will hike again for some
time."
Australia's 10-year bond yields fell 5
basis points to 1.78%. New Zealand's dropped as much as 8 basis points to
1.899%, a record low in data compiled by Bloomberg since 1985. In Japan, the
benchmark fell 2 basis points to minus 0.084%. Yields on German debt fell below
zero for the first time since 2016 after weak factory data Friday. Still,
confidence among German firms unexpectedly improved this month, according to
the Ifo.
Australian bonds have rallied since
central bank Gov. Philip Lowe pivoted to a neutral stance last month from a
long-held view the next move in rates would be up. The local yield curve
flattened further, with the difference between three and 10-years narrowing by
2 basis points to 38 basis points.
The nation's bond curve will flatten
more, Goldman Sachs Group (GS) strategists including Praveen Korapaty
wrote in a note. "The RBA may eventually be drawn into a cutting cycle
should data deteriorate from here," they said. "Relative to current
pricing we think risk-reward favors curve flatteners."
Emerging stress
The flight to safety is spurring
sell-offs in some parts of emerging Asia. Yields on Indonesian debt due in 10
years climbed 6 basis points to 7.67% as investors ditch high-beta assets.
The inverted yield curve in the
world's biggest bond market is sending a negative signal for developing-nation
assets, according to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New
York.
"If sustained, it would signal a
likely U.S. recession in the next six to 24 months," he said. "This
is hardly conducive to risk and EM assets, which we see remaining under
pressure this week."