Published: Mon, April 01, 2019
Finance | By Kristine Clayton

Yields above 15-month lows

Yields above 15-month lows

Investors have been spooked by sharp falls in U.S. bond yields and an inversion of the U.S. Treasury yield curve, which is widely seen as an indicator of an economic recession.

Monetary policy in Europe appears poised to support global debt as well. While its market has not been directly impacted by central bank purchases, its economy is so closely tied to its southern neighbor that it rarely enters a recession without a US contraction. The Fed funds rate, which hovers between 2.25% and 2.5%, is not expected to increase due to slower economic growth and increasing overseas risks, said the central bank.

Haven demand was also spurred by some concerns in emerging markets, with the Turkish lira plunging as traders grappled with the government's curbs on trading the currency.

Auction Appetite The next significant test for the Treasury market is set to be Wednesday's auctions.

The Treasury Department will sell US$113 billion (RM459 billion) in coupon-bearing supply this week, including US$40 billion in two-year notes today, US$41 billion in five-year notes tomorrow and US$32 billion in seven-year notes on Thursday. The sale of 2024 securities will be of particular interest given the recent outperformance of that part of the curve, generally referred to as the belly.

Benchmark 10-year notes last rose 9/32 in price to yield 2.3806 percent, from 2.412 percent late on Tuesday. That's because a fall in financing costs likely sparked more people to refinance their mortgages, cutting mortgage-bond holders duration.

"The market in general has battled this idea of whether there is a global slowdown occurring, and more specifically, whether it is going to impact the US", said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.

Benchmark 10-year U.S. Treasury yields were above 15-month lows.

"Further declines in the 10-year require pricing in of more rate cuts, but since 2014, the market has been hesitant to price more than 1 rate move by the Fed in either direction", Chadha wrote in a note.

Adding to the downside market risks, the analysts don't see the Federal Reserve cutting interest rates until it is crystal clear that the economy is in trouble. China's rapidly slowing economy and even a decelerating US economy are top of mind as well.

The 3-month rate last week dipped underneath the 10-year yield for the first time in more than a decade and on Wednesday it fell to as much as 11 basis points below. A normal yield curve is up-sloped, meaning that longer-term bonds generate higher returns than shorter-term bonds and is often correspondent to a period of economic expansion; a flat yield curve means longer-term bonds and shorter-term bonds return equally; and, likewise, a down-sloped, or inverted, yield curve means that longer-term bonds generate lower returns than shorter-term ones and is indicative of an economic recession, which is what happened last week.

Although the 2015 recession was not preceded by an inverted curve, the prior contraction, in 2008-09 during the global financial crisis, was. "One is that the Fed and global central banks are keeping rates on hold, and that's creating a very supportive backdrop", said Gennadiy Goldberg, an interest rate strategist at TD Securities in NY.

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