Investors rush to safety in government bonds
Investors flocked to the safety of government bonds on Friday, sending yields around the world to some of the lowest levels on record in a bet that President Donald Trump’s plans for additional tariffs on Chinese imports will hit growth and force central banks to pump more stimulus into the financial system.
With prices rocketing, the yield on 30-year German government bonds plummeted into negative territory for the first time in history, briefly pushing the country’s entire government bond market — the bedrock of European debt markets — below 0 per cent. Germany is now the largest economy to have had entirely negative yields, following in the footsteps of Denmark and Switzerland.
“The moves in Europe in particular are fairly staggering,” said Iain Stealey, international chief investment officer for fixed income at JPMorgan Asset Management. “The assumption in the market had been that the trade tensions had stabilised.”
The rush to the world’s safest markets came as investors and policymakers grow increasingly pessimistic about the outlook for global growth while the trade dispute begins to disrupt global supply chains and weigh on investment and inflation. Central bankers have moved to loosen monetary policy or signalled plans to do so as a result, further buoying global debt.
The sharp rally in German debt reflected a similar shift in the US. The benchmark 10-year US Treasury yield hovered near its lowest level since 2016, and the yield on the two-year Treasury bill, which is more sensitive to monetary policy, steadied around 1.7 per cent — a threshold last reached two years ago. Yields fall when prices rise and negative yields mean new buyers are guaranteed to make a nominal loss if they hold the debt to maturity.
The global bond rally capped a volatile week for investors, following a surprise-filled Federal Reserve meeting and a sharp escalation in trade tensions between the US and China.
On Thursday, Mr Trump said the US would impose new tariffs of 10 per cent on all remaining Chinese imports, adding to the 25 per cent levies that already apply to $250bn of Chinese goods.
Investors fear the move will further weigh on an already-fragile global economy — a phenomenon the IMF has recently warned about. The Fund recently slashed its growth forecast for global growth in its fourth downgrade since October, citing the trade war and UK’s impending exit from the EU as the leading catalysts for a potential contraction.
“It’s amazing that today investors are willing to pay the German government to lend them money for 30 years,” said Andrea Iannelli, investment director at Fidelity International. “Global growth is getting worse, there’s not much inflation around and we think the Fed will have to cut again this year. That’s what bonds are telling us.”
The timing of the tariff threat was notable to many market participants, as it came on the heels of the US central bank’s decision to slash its benchmark interest rate by 0.25 percentage points, but also to resist committing to a deeper monetary easing cycle — a move Mr Trump swiftly criticised.
But given that the Fed has placed increasing emphasis on global economic weakness and downside risk from the trade war when it comes to formulating its monetary policy, many believe the latest salvo could force the US central bank’s hand to embark on a much deeper easing cycle than previously planned.
“The Fed can’t run monetary policy tweet by tweet,” said Eric Stein, co-director of global income at Eaton Vance. “But every time one of these shocks happens, it makes the Fed’s job a lot harder.”