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The yield on the U.S. Treasury market’s most watched benchmark – the 10-year note – is on the verge of falling below its previous all-time record low as investors contend with renewed concerns that the pace of economic recovery will slow for the rest of the year, following a sharp contraction in GDP in the second quarter.
Without a new fiscal stimulus package from Congress, the expectation is for U.S. consumer spending to fall off dramatically, setting back the efforts of households and businesses to rebound from the economic devastation caused by the COVID-19 pandemic.
“Treasury yields will continue to grind lower due to the combination of economic risks and the fact that the Fed will keep rates low for a number of years to come,” said John Canavan, lead analyst at Oxford Economics, in an interview.
The 10-year Treasury note yield TMUBMUSD10Y, 0.503% closed at 0.514% on Tuesday, near its record closing low of 0.501% set on March 9, Tradeweb data show.
Other short-dated maturities including the 2-year note TMUBMUSD02Y, 0.101% and the 5-year note TMUBMUSD05Y, 0.187% had already hit record low yields in past sessions.
The drop in bond yields has, in turn, propelled other assets higher. Gold GOLD, +3.65% has set new records with every passing day, and internet and technology stocks which have benefited from the trend to work from home during the pandemic have shown remarkable gains this year.
The tech-heavy Nasdaq Composite COMP, +0.35%, for example, is up more than 21% year-to-date. That compares with a 2% rise in the S&P 500 SPX, +0.36% over the same stretch.
Part of the increased bullish momentum in the Treasurys market reflects concerns federal and local officials have failed to control the coronavirus. Without a substantial improvement on the medical front, industries dependent on a loosening of social restrictions and activity will struggle to return to normal, said analysts.
The low yields also reflect the reluctance of traders to bet against the Federal Reserve given the central bank’s commitment to keeping monetary policy easy for the foreseeable future.
“We see the Fed standing ready to increase its purchases of long-term US Treasuries should their yields rise too fast,” said Lauréline Renaud-Chatelain, a fixed-income strategist at Pictet Wealth Management, in a Tuesday note.
Senior Fed officials, including Fed Chairman Jerome Powell, have said the central bank would not raise interest rates from the current near-zero level until unemployment and inflation has recovered.
Moreover, the expectation is for the Fed to soon update its monetary policy strategy, pledging to normalize interest rates only when inflation had overshot its 2% target for some time to make up for periods when prices had lurked below its aim.
With the Fed’s communications leaving little ambiguity on its policy stance, volatility in the Treasurys market has all but evaporated.
The ICE BofA MOVE Index, which tracks implied expectations of Treasury volatility over the next 30 days based on prices of options, stood at 41.98, near its record low of 40.66 set last Thursday.
