With a flurry of fresh COVID-19 cases and early signs of how severe the hit on the global economy could be, seasoned strategists are now warning that U.S. growth could come to a halt this year and that some Treasury yields may drop below zero — possibly as soon as this week.
The warnings come as a rout in equities and rate-cut expectations sent long-term Treasury yields to unprecedented lows last week. Over the weekend, China’s manufacturing purchasing managers’ index plunged to the lowest value on record amid a surge in COVID-19 cases and new fatalities around the world — including the first in the U.S.
Rates derivatives traders were already putting on wagers last week targeting the Federal Reserve slashing rates to zero by mid-year. Those bets are now likely to intensify as some investors start to see the risk of the U.S. economy screeching to a halt, or even slipping into a recession, by the end of the year. Scott Minerd, the chief investment officer of Guggenheim Partners, said such expectations will push U.S. Treasury yields below zero for the first time.
“The shorter-term securities are going to be negative,” said Minerd, who oversees about $215 billion. “This could happen this week.” He said the 10-year Treasury note yield could drop to as low as zero but that it would be hard for it to drop below that.
“Even if you have the 10-year note yield at 25 basis points, you are going to have the majority of the curve at negative rates,” he said.
The stock of global negative-yielding investment-grade debt has jumped back up to over $14 trillion, from just under $11 trillion in mid-January. However, most of that is concentrated in Europe where the European Central Bank has slashed its benchmark rate below zero. Negative rates have long been seen as an anathema in the U.S.
With the economic impact of COVID-19 rippling from China to Europe and the Americas, a slew of Wall Street economists have turned more pessimistic and penciled in Fed rate cuts.
Goldman Sachs Group Inc.’s economists on Sunday bumped up how much they expect the Fed to ease in 2020, after adjusting their forecast just last week. They now expect the Fed will cut rates 50 basis points this month, followed by another 50 basis points of easing sometime in the second quarter, Goldman’s Jan Hatzius and Daan Struyven wrote in a note. On Friday, they predicted a 25 basis point cut at the March Fed policy meeting followed by 50 additional basis points in cuts through June.
The 2-year Treasury note yield ended last week at 0.91 percent, in one of its most precipitous declines in the past decade, as rates traders ramped up expectations for a rate cut at the March 17-18 policy meeting. Fed chairman Jerome Powell said in rare unscheduled remarks Friday that the Fed would act if needed. Since then, the U.S. reported its first related fatality and Washington’s governor declared a state of emergency.
“It’s hard to imagine that the global recession of 2020 hasn’t already commenced,” said Jack Malvey, a debt veteran and former chief global fixed-income strategist at Lehman Brothers Holdings Inc. “A decent part of the U.S. yield curve should end up in negative territory. The question really is only how far out the curve,” said Malvey, who is now counselor at the Center for Financial Stability Inc. He predicted negative rates are likely at least in the 3-year maturity point.
Skittish investors are also continuing with their flight into haven currencies. The yen surged in early Asia trading versus the greenback to an almost five-month high. That added to gains of over nearly 3.5 percent last week for the yen. The Australian and New Zealand dollars slid, with Australia also reporting its first death from the virus.
“The news about the virus getting worse is destabilizing for markets,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia. “There is probably a bit more of a shake-out to come overall,” he cautioned, adding that yields were likely to fall further while haven currencies keep appreciating.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.