Bond yields fall to lowest levels since 2016

Long-term yields are so low that they have priced in slowing growth, inflation

Bond price volatility and gold prices have risen as bond market participants expect the US Federal Reserve and other central banks to slash rates to counter a potential recession. London:- GLOOMY investors are buying low-yielding bonds as they fear that the United States and global economies are slowing.

Bond price volatility and gold prices have risen as bond market participants expect the US Federal Reserve and other central banks to slash rates to counter a potential recession.

Yields have tumbled since the much higher levels prior to the 2008 crash

A key indicator that economists are observing is the relationship between short-term and long-term interest rates. Currently, three- and six-month US treasury yields are 0.08 per cent higher than the 2.06 per cent yields of treasury bonds that are to be redeemed in 10 years, that is, 2029.

In bond market jargon, this is an inverted yield curve. Normally, the yield curve slopes upwards – that is, yields of bonds due to be repaid in say 10 or 15 years are higher than yields of bonds due to be repaid within months or between one and three years.

In a strong economy, long-term bond yields tend to be higher as growth and inflation are expected to rise. But when investors are prepared to pile into long-term bonds and push their yields below short-term bonds, economists regard the moves as a sign that investors believe that economies are beginning to slow down, possibly leading to a recession.

The bond bull market has been in force for several months as investors fear that the trade wrangle between the US and China is likely to cause a decline in global growth.

More recently, bond prices jumped and yields fell on news that US companies created just 75,000 jobs last month, well below forecasts of 180,000 jobs. The employment situation report has a significant impact on the Fed rate decisions as job growth is central to the central bank’s mandate.

Lacy Hunt, economist at Hoisington, a US Treasury bond fund specialist, has been forecasting a slowdown in the US economy for several months.

Hoisington’s latest economic report cautions that the premium of short-term rates over long-term rates is a sign that the Fed’s interest rate policy has been too tight.

Hoisington contends that the Fed should cut its rate by at least 0.5 per cent to counter a slide in the economy.

Gary Shilling, an independent consultant and Brendan Brown of the consultancy also warn that the US economy is on a downward slide. Mr Brown says that the dollar will remain strong against the euro, pound, yen and Asian currencies as the European and Japanese economies, in particular, are weaker than the American economy.

Moreover, a strong greenback places pressure on companies and states that have borrowed trillions in US dollar denominated debt. Companies with high yield debt and over-borrowed private equity funds could come under pressure, Mr Brown cautions.

Unexpected economic upturn and inflation could cause yield spike and bond price declines

Keith McCullough, CEO of Hedgeye, an adviser and manager of hedge funds, believes that the market is far too optimistic about the likelihood of a Fed rate cut. He is bearish about equities, however, as he expects a downturn in US corporate earnings in coming months.

That view appears to be contradictory as investors tend to buy bonds when equity prices fall. A Wall Street Journal review on economist and analyst predictions in January shows that the vast majority predicted a rise in 10-year US Treasury bond yields in January with some expecting yields of 4 per cent in June and 3.5 per cent by the year-end. Almost no one predicted levels around 2 per cent.

A contrarian view against the current market bullishness of developed nation sovereign bonds comes from Larry Kudlow, director of the US National Economic Council. Opposing negative economic views of most economists, Mr Kudlow predicts that the US economy will continue to grow briskly through the rest of 2019 even if the US and China don’t reach a trade deal.

“The US economy is very strong,” he said on CNBC. “I think we’re in very good shape and I think we’ll maintain a 3 per cent growth pace this year.”

Mr Kudlow added: “That 3 per cent number is not contingent on a China deal that might not be satisfactory for American economic interests. What has changed is lower tax rates, massive deregulation, opening up the energy sector and various trade reforms.”

As President Donald Trump’s economic adviser, Mr Kudlow obviously puts forward the most optimistic economic spin. Nevertheless, long-term bond yields are now so low that they are already pricing in both a slide in economic growth and inflation.

© Copyright Neil Behrmann. This article was first published in The Business Times, Singapore
Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. See reviews of both books on

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