THE SWIRL of fresh coronavirus cases and signs of the severity of the hit on the global economy have seasoned strategists warning that US growth could come to a halt this year and some Treasury yields may drop below zero — possibly as early as this week.
The warnings come as a rout in equities and rate-cut expectations sent long-term Treasury yields to unprecedented lows. Over the weekend, China’s manufacturing purchasing managers’ index plunged to the lowest on record amid a surge in coronavirus cases and new fatalities — including the first in the US — around the world.
Rates derivatives traders were already putting on wagers last week targeting the Federal Reserve slashing rates to zero by mid-year. These bets are likely to intensify as some investors now see the risk of the US 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 Treasury yields below zero for the first time.
“The shorter-term securities are going to be negative,” said Mr. 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 though it would be hard 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 been long seen as an anathema in the US.
With the economic impact of the virus outbreak 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 central bank to cut by 50 basis points this month, followed by another 50 basis points (bps) in the second quarter, Jan Hatzius and Daan Struyven wrote in a note. On Friday, they predicted a 25 bps at the March policy meeting followed by 50 additional basis points through June.
The 2-year Treasury note yield dropped as much as 17 bps to 0.74% on Monday, extending one of its most precipitous declines in the past decade as 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 it would act if needed. Since then, the US reported its 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 US yield curve should end up in negative territory. The question really is only how far out the curve,” said Mr. 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 Japanese yen gained 3.5% last week.
JPMorgan Asset Management has been de-risking portfolios by adding “high quality” duration and havens such as the yen and Swiss franc, according to Chief Investment Officer Bob Michele. “Recession risk rises to become inevitable the longer these uncertainties persist,” he said in a note.
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 said. “Yields should fall further and the haven currencies to keep appreciating.” — Bloomberg