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The recovery in the global bond market accelerated on Wednesday. The New Zealand central bank was the last to make a dismal note on economic growth and traders have been betting on the fact that the Federal Reserve will start cutting interest rates this year.
The 10-year Treasury bond rate has further declined by 6 basis points to 2.37%, its lowest level since 2017, as the US bond market moves towards its best monthly performance since then. more than 10 years. Traders are now betting that there is a probability of nearly 80% that the Fed is lowering rates at least once this year – and a real chance of several cuts.
The upturn in fixed-income securities in March became widespread and supported the debt of virtually all highly rated governments. Germany even sold 10-year bonds with a negative return for the first time since autumn 2016, pointing out that the decline in government bond yields has begun to affect transactions on the US dollar. primary market.
Investors are increasingly disappointed with the prospects of the global economy as growth slows in Asia, Europe and the United States. The European Central Bank and the Fed have been much more dovish lately, the last week having left out plans for interest rate increases in 2019. These fears of policy makers have simply fanned the fears of investors.
"If you look around the world, with almost total consistency, you've seen a similar level of rally in Treasuries, Gilts, Bunds, and even Australia," said Scott Thiel, Chief Income Strategist. fixed at BlackRock. "It's not an individual reaction to something idiosyncratic. This is a larger increase in risk-free rates.
The gloominess seems to be spreading. The Reserve Bank of New Zealand kept interest rates unchanged earlier Wednesday, but warned that the worsening global economy meant its next decision would be more likely to loosen policy rather than tightening.
The yield on 10-year New Zealand government bonds dropped by 11 basis points to a record low of 1.76% and was enough to spill over into other bond markets. "Almost all central banks are dovish," said Salman Ahmed, chief investment strategist at Lombard Odier.
Highlighting the magnitude of the skyrocketing global bond market, the average yield on the Bloomberg Barclays Multiverse index – which tracks more than $ 50 million in fixed income – rose 2.5% at its highest level in six years.
This is a boon to many governments, who benefit from lower borrowing costs. The German government sold Wednesday € 2.4 billion of 10-year securities with an average yield of minus 0.05%, according to the German Finance Agency. In strong demand, the agency said it received 2.6 times more debt offers than it had accepted.
While short-term bonds previously had a negative return, it was the first time that Germany was selling Bunds, whose term was at least 10 years, with a yield less than zero since October 2016. This negative return means that investors who bought Wednesday at auction and at maturity are badured of a loss.
However, the gloomy bond market has raised concerns about the end of the post-crisis global economic recovery and its end. Long-term US Treasury yields are now lower than short-term government bond yields, a reversal of the usual form of the "yield curve" that has historically been a good omen. recession.
"The global macroeconomic situation, particularly in Europe, is causing more and more concern and the population is not well prepared," said John Taylor, Co-Head of European Fixed Income at AllianceBernstein. "The world's central banks have completely changed course. Real inflation is not a cause for concern, and central banks are feeling no pressure upward. "
As a result, global stocks have become more nervous lately, the FTSE All-World fell 0.7% on Wednesday, its fifth day of decline since the Fed meeting last week.
However, Mr. Ahmed of Lombard Odier argued that the yield curve was a too simplistic recession indicator and said the recent market turmoil was a buying opportunity as long as growth remained resilient and banks central would remain dovish.
"If you look at data from December to March, it's not that bad, but the Fed played a crucial role. It's the most serious pivot of the Fed outside years of recession, "he said. "If the data stabilizes and the reaction function has changed, the actions should increase because the economic cycle is prolonged," he said.
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