Real yields on US Treasuries hit minus 1 per cent on Friday, reflecting investors’ readiness to pay up for safe assets as a surge in coronavirus cases threatened the country’s nascent economic recovery.
The real yields on 10-year Treasuries — which strip out expected consumer price-changes from nominal bond yields — slid as low as minus 1.005 per cent on Friday, down from minus 0.979 per cent on Thursday. Yields fall as bond prices rise.
The drop took real yields to a level only touched during the early part of March’s market turmoil, when investors rushed for haven assets — and below where they were in 2012, when the Federal Reserve announced an open-ended bond-buying programme to suppress rates and stimulate economic growth.
The fall in real yields, derived using Treasury inflation-protected securities, reflects traders’ expectations that the US central bank will not raise interest rates for the next few years. Data released on Thursday showed that the US economy had suffered its biggest postwar contraction in the second quarter. A day earlier, the Fed tied the economy’s prognosis to the pandemic, as it held rates near zero.
“The path of the economy is going to depend to a very high extent on the course of the virus and on the measures that we take to keep it in check,” Fed chair Jay Powell said. “That is just a very fundamental fact about our economy right now. The two things are not in conflict.”
Jim Caron, a senior portfolio manager with Morgan Stanley Investment Management, said the Fed is “steadfast, unwavering and unapologetic about [its] desire to keep policy rates low for as long as possible”.
Rising coronavirus cases and deaths in parts of the US, together with economic indicators suggesting a faltering recovery, have fuelled expectations that the Fed will keep rates anchored near-zero in the years ahead, said Eric Stein, co-director of global fixed income at Eaton Vance.
Traders are now betting that the Fed will not lift interest rates until at least 2023, according to futures markets. The yield on the benchmark 10-year Treasury has fallen 0.04 percentage points this week to 0.55 per cent, just a hair above its all-time closing low, according to data from Bloomberg and the US Treasury.
Futures contracts for the 10-year note settled at their highest price since at least 2003 on Thursday, according to exchange operator CME Group.
Investors are now gearing up for the Fed’s next scheduled policy meeting in September. Speculation has intensified that the central bank will announce a more explicit form of forward guidance for the future path of interest rates, tied to metrics such as the unemployment level or inflation rate.