The rate on the benchmark 30-year Treasury bond sank to an all-time low on Wednesday while the U.S. yield curve inverted even further as fixed-income traders grew more confident in forecasts of tepid inflation and slower economic growth.
The 30-year bond yield dropped to as low as 1.907% early Wednesday morning, breaking its prior all-time low of 1.916% clinched earlier in August. The 30-year rate later moved off those lows to trade at 1.933%, still below yields on U.S. debt of far shorter duration such as 3-month and 1-month bills.
The yield curve inversion, meanwhile, continued to worsen on Wednesday. The yield on the benchmark 10-year Treasury note slumped further below that of the 2-year note — at 1.464% and 1.502%, respectively — after closing inverted for the second day in a row on Tuesday. Yields fall as prices rise.
Bond traders consider a 10-year rate below the 2-year yield an notable recession signal, marking an unusual phenomenon as bondholders receive better compensation in the short term. Before August, the last inversion of this part of the yield curve began in December 2005, two years before the financial crisis and subsequent recession.
The spread between the 3-month Treasury yield and that of the 10-year note — the Federal Reserve’s preferred inversion metric — sank to -54.5 basis points, its lowest level since before the financial crisis.
“There’s just a huge Asian bid for any kind of yield,” said Tom di Galoma, head of Treasury trading at Seaport Global Holdings. “It’s kind of my feeling that you just don’t have enough fixed income in the world to actually satisfy the demand. It’s kind of a one-way trade.”
“But my feeling is that interest rates are telling you that there’s some very bad news down the road,” he added. “We don’t know what that is, but that’s what’s being signaled to me.”
Traders across the board have pointed to a deterioration in U.S.-China trade relations as the catalyst for August’s dramatic stock and bond moves, including a 60-basis-point drop in the 10-year Treasury rate. But notwithstanding the latest barbs between the world two largest economies, Treasury demand remains strong and likely symptomatic of traders’ belief in a larger, more malignant downturn in the global economy and a secular decline in inflation.
Lukewarm inflation expectations and the Fed’s perceived inability to goose prices higher have sparked a rash of Treasury buying as traders try to lock in rates they believe will exceed inflation in the long term. Investors tend to sell Treasurys when inflation is high because it erodes the purchasing power of bonds’ fixed payments.
The Fed tries to keep inflation around its 2% target, a pace it feels is both healthy and sustainable for the U.S. economy. But despite historically low interest rates, price gains have remained tame.
The bond market’s inflation expectations are perhaps most evident in the yields on Treasury inflation-protected securities, or TIPS.
TIPS are like other Treasury bonds, but differ in that they’re adjusted for inflation on a regular basis. Therefore, the spread between TIPS rates and those on standard Treasury bonds can be used an approximation for the market’s inflation outlook.
Though the bid for Treasurys began overnight in Asia, geopolitical developments in the United Kingdom pushed both global rates and sterling even lower. U.K. Prime Minister Boris Johnson said he would schedule the formal reopening of parliament for Oct. 14 in a move that would limit legislative time before the country’s Brexit deadline and heighten the odds of a no-deal departure.
For a global investor community already on edge about the direction of economic growth, Johnson’s announcement provided little relief and stoked concerns about the country’s economy if it severs ties with its largest trading partner.
The pound fell by 1% to below the $1.22 mark on Wednesday at 9:00 a.m. London time following Johnson’s comments, but slightly pared losses to trade 0.6% down at $1.2211 by late morning. Other yields followed suit, with the 10-year Italian yield falling below 1% for the first time ever; German and French 10-year rates also fell to record lows.