Traders work at the New York Stock Exchange, February 4, 2020.
Bryan R Smith | Reuters
So long as the coronavirus poses a threat to global economic growth, bond yields are likely to stay around the record-low levels where they’ve been trading as the disease threatens to morph into a pandemic.
U.S. government bonds have been a safe haven for investors amid cascading losses on Wall Street. The 30-year bond again fell below 2% recently, while the benchmark 10-year note hit its historic low point earlier this week.
Bond market pros see a variety of reasons for the trend lower, including but not limited to the coronavirus outbreak. There’s also general concern about global growth, worries over negative rates in the U.S., and the ever-changing political landscape that has thrown uncertainty into what the government will look like come 2021.
“It’s hard to measure exactly what’s driving it, but I do think it’s a movement away from a more moderate [coronavirus] outcome that has created some pressure on risk and the bid for the rates market,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income. “My sense is the most recent move is concern out of Europe and Asia that the virus is spreading faster.”
Wednesday’s rally on Wall Street briefly stunted the U.S. yield plunge that began in mid-January as the coronavirus outbreak ecame global news.
Yet the trend lower began well before this year. The move in fact has been part of a generational decline that has roots back to the early 1980s and has accelerated as global central banks have kept rates low in an effort to stimulate halting economic growth.
Even with the recent downturns, U.S. yields remain above most of their global counterparts, indicating there could well be further room to the downside.
“What the coronavirus is doing is accelerating the shift that was going to be the new range going forward anyway,” said Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income. “When things are bad, the range is going to be possibly zero handles all along the curve.”
“The United States cannot be well above 1%” as other central banks continue to cut, Tipp added.
Indeed, the Federal Reserve is under pressure to reduce rates further to brace against a coronavirus-induced slowdown. However, there are doubts about how effective cuts would be given how low rates have gravitated on their own and the difficulty of monetary policy to address a supply-driven shock.
To be sure, there’s also some thought that the plunge in rates could be reversed.
After all, economic data has been solid after last year’s recession scare. The Citi Economic Surprise Index, which measures the data against expectations, recently touched a two-year high.
Should the coronavirus scare pass, “investors should be prepared for the possibility of a bad reaction from the bond market because yields are already much lower than they have been, traditionally, compared to the character of several economic fundamentals,” Jim Paulsen, chief investment strategist at the Leuthold Group, said in a note.
For now, though, the trend in rates is lower as investors react to the virus spread and their myriad other concerns.
“People are going to need a clear trajectory so they can guess the endpoint in terms of damage to the economy and when we are going to stabilize,” Tipp said. “We could be close to that, but it’s not clear at this point. That means there could be some further risk aversion in the market.”