Treasuries investors are casting a wary eye abroad after a barrage of sloppy overseas data roiled the world’s biggest bond market.
Fears of a worldwide slowdown erupted last week following weak German and Chinese economic reports, sending benchmark 10-year Treasury yields briefly below the two-year rate for the first time since 2007. The yield on 30-year Treasuries plunged through 2% to hit a record low, despite solid US inflation and hotter-than-expected retail sales.
Global forces are likely to remain in the driver’s seat for the $16 trillion Treasuries market in a week largely devoid of meaningful US data, according to Principal Global Investors’ Seema Shah. A lot of “panic” evident in the US bond market is being imported from China and Europe’s darkening economic picture, she said. For that reason, Shah will be monitoring upcoming euro-area inflation and manufacturing reports for a clue on where yields are heading.
“The global data is going to struggle to see an upward trend, so that’s going to continue to put downward pressure on yields, especially on that long-end,” said Shah, the firm’s chief strategist. “Until you get stronger data from Europe or China, those global concerns are here to stay.”
Rates on 30-year bonds ended the week 22 basis points lower at 2.03%, after hitting an all-time low of 1.91%. Reports that Germany is considering fiscal stimulus sent rates on long-bonds higher by 6 basis points on Friday, despite US consumer sentiment dropping to a seven-month low. The yield ended near its highs of the day after the US Treasury Department said it’s contemplating selling 50- and 100-year debt, going well beyond the current three-decade maximum.
The 10-year Treasury yield ended Friday at 1.55%, a day after breaking below 1.5% for the first time since 2016. While it’s become “difficult not to expect” that the benchmark rate will breach its record low of 1.31%, this will depend on global growth and trade developments, according to BMO Capital Markets.
“The chances of seeing new record lows in 10-years is largely dependent on the performance of risk assets, which are in turn beholden to the prospects for an easing of the global headwinds,” BMO strategists led by Ian Lyngen wrote in a note Friday. “These issues will not be resolved anytime soon.”
But there is one can’t-miss event in the US in the week ahead: the Federal Reserve’s annual symposium in Jackson Hole, Wyoming. Fed Chairman Jerome Powell will take the stage on Friday to deliver a speech titled “Challenges for Monetary Policy.”
Bond traders will listen for reassurance from Powell that the Fed will support the economy and for any comments from him on recent market turmoil, Shah said. The massive rally in longer-dated debt suggests that markets are skeptical that monetary easing will be sufficient to boost growth and inflation, in her view.
“Jackson Hole is going to be important because, at this moment in time, there are so many questions about the effectiveness of central banks,” Shah said. “One of the reasons why there’s so much panic about a return to recession is because they know the Fed is running out of bullets.”