(Bloomberg) -- Investors cramming into government bonds are sending yields around the world to multi-year lows as they dash for protection from dimming growth and seek to benefit from more accommodative central banks.
New Yorkers were still wrapping up the previous day’s business when the first of Friday’s milestones was reached, as yields on New Zealand’s bonds tumbled to a record. Japanese markets swiftly followed, with the 10-year yield sinking to a two-year low of minus 0.08%. Another wretched batch of European data drove German rates below zero for the first time since 2016 before disappointing U.S. PMIs delivered the sucker punch, pushing the yield on 10-year Treasuries below the three-month bill rate.
“This will be the year that we say: ‘Really, bond yields have plunged this much!?’” said Akira Takei, a global fixed-income fund manager in Tokyo at Asset Management One, which oversees more than $500 billion. Central banks in the U.S., Australia and New Zealand will probably all cut interest rates this year, he said.
So much for the oft-predicted -- and as yet unrealized -- end of the bull run in government debt. Less than two weeks after the European Central Bank gave German bunds a boost by abandoning plans to hike rates this year, the Federal Reserve on Wednesday did the same with its dot-plot projections. The U.S. central bank also announced an earlier-than-anticipated end to its bond-portfolio run-down.
“I didn’t think we would see this day again,” said Orlando Green, an interest-rate strategist at Credit Agricole SA, referring to the slide in bund yields. “At these levels the market is no longer looking at bond being held to maturity, but rather an insurance against a political earthquake coming with a significant economic slowdown.”
Here are some charts showing how fast global yields are falling:
Japan’s benchmark 10-year yield fell further into negative territory Friday, breaking below the level of minus 0.05 percent that had held three times this year. The yield on 10-year Treasuries dropped as much as 10 basis points to 2.44 percent, the least since January 2018.
Germany is also experiencing a bond market rally, with benchmark 10-year yields dropping below zero on the back of disappointing manufacturing purchasing managers indexes. Euro-area peers tracked the move, though those from the weaker economies including Italy failed to keep pace with the move in bunds.
Friday’s tale began in Australia and New Zealand. Ten-year yields in the two countries have both fallen below 2 percent in recent weeks -- New Zealand’s for the first time ever -- as investors bought the securities following the Fed’s dovish tilt and as the two South Pacific central banks also acknowledged the increasing chance of rate cuts.
Meanwhile in Canada, investors are getting little reward for locking away their money, with the 10-year rate now firmly ensconced below the Bank of Canada’s 1.75 percent target.
A big part of the recent global bond rally is that the market anticipates the Fed’s more cautious approach will eventually resolve itself into lower interest rates. Overnight-index swaps indicate traders are now pricing in two U.S. rate cuts by the end of next year.
The Fed will start an easing cycle in October, helping to push Treasury 10-year yields down to 1.75 percent, Asset Management One’s Takei predicts.
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