Via Financial Times

US bond markets sent bearish signals in stark contrast with rising equity prices as yields on two- and five-year Treasuries fell to their lowest levels ever and futures investors priced in the possibility of negative rates.

The latest leg lower in government debt yields followed news on Thursday that 3.2m Americans filed for first-time unemployment benefits last week, bringing the total to more than 33m in the coronavirus crisis.

While the US benchmark S&P 500 index rose 1.2 per cent, the yield on the two-year Treasury note slid to 0.13 per cent, falling below the record set during the European-debt crisis in 2011. The yield on the five-year Treasury fell 0.08 percentage points to 0.3 per cent. Yields fall as prices rise.

Contracts for fed funds futures — which anticipate the overnight interest rate set by the Federal Reserve — were quoted at prices that implied rates of between minus 0.015 per cent and minus 0.03 per cent for late 2020 and early 2021.

The move came despite comments in March from Jay Powell, the Fed chair, that a negative interest rate policy was not appropriate in the US.

“Today is a head scratcher,” said Bret Barker, the head of government debt at asset manager TCW. “The outlook is so uncertain right here it’s hard to make a call on how it looks on the other end [of the crisis].”

Line chart of Five-year US Treasury yields, % showing Investors brace for negative rates

Investors noted that lacklustre growth and inflation have followed negative rate policies in Japan and Europe. Sweden, the first country to take its main policy rate negative in 2015, ditched the experiment in December.

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“Many central banks have seen the error of the ways of the European Central Bank, Swiss National Bank and Japan,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group,

John Briggs, head of strategy for the Americas at NatWest Markets, said he saw a very slim chance the central bank would pursue such a policy — but cautioned against writing it off altogether. 

“Even if you don’t think it is likely, you need to hedge for it,” he said.

Mr Briggs flagged the enormous action taken by the central bank since March, when volatility swept across financial markets. Beyond slashing rates to zero and lifting caps on asset purchases, the Fed took unprecedented steps to backstop markets it has never waded into before, including those for high-yield corporate bonds and municipal debt. 

“We have seen how quickly things can change,” said Mr Briggs.