US Treasury yields closed at new lows on Tuesday as anxious bond investors continued to drive a “relentless rally” in government debt that stood in stark contrast to America’s much more optimistic equity market.
The yield on the 10-year Treasury note dropped 0.05 percentage points to a record low 0.52 per cent, according to the US Treasury department’s daily closing calculation.
The debt benchmark has only once briefly fallen below that number in intraday trading at the height of the coronavirus crisis. On March 9, the 10-year yield plunged to 0.31 per cent before rising again.
On Tuesday, the yields on three-, five- and seven-year notes also closed at fresh lows.
“What you are seeing right now is continuing angst about what the future holds,” said Patrick Leary, chief market strategist at Incapital, citing the wobbly US economic recovery in the face of persistent virus infections and delays to a new round of fiscal stimulus.
“If you have a situation where things are not going well, the recovery is stalling and there is gridlock in terms of what is happening in Congress, you tend to see safe-haven plays.”
Emergency federal unemployment benefits, which provided a key source of funds for millions of out of work Americans, expired last week and Congressional leaders have so far been unable to come to a compromise on extending them. A few days of lower Covid-19 case numbers across the sunbelt region has raised hopes that the spread may be decelerating again, but a vaccine that will bring the pandemic fully under control may still be months away.
Anne Mathias, a global rates and FX strategist at Vanguard, said there was a “good news gap” that had curtailed investors’ optimism for the time being.
As well as US Treasuries, the bid for safety has also given gold a boost. On Tuesday, prices for the precious metal hit a record high of $2,000 an ounce.
The US stock market is buoyant, however, as investors upset by the low yields in bonds have been pushed into riskier assets. The S&P 500 is within 2 per cent of its all-time high, and the tech-heavy Nasdaq already is at a record.
The divergence can be explained in part by the Federal Reserve, which has stepped in forcefully to support financial markets. Worried about the effects of the latest coronavirus spikes on the nascent recovery, it has also vowed to keep monetary policy extremely accommodative for the foreseeable future.
“Someone just opened a massive firehose of liquidity . . . and it has to go somewhere,” said Ms Mathias, flagging the growing “disconnect” between equity and rates markets. Still, she predicts the “relentless rally” in Treasuries would continue, given the long wait until the next Fed policy meeting in September.
The historically low Treasury yields suggests the markets see no problem absorbing the extra supply coming from a federal government whose deficit has ballooned.
On Monday, the Treasury department said it expected to borrow an additional $2.2tn by the end of the year, having already borrowed nearly $3tn in the second quarter.
Strategists anticipate the Treasury will increase the proportion of its borrowing through longer-term debt. Details are expected on Wednesday, but few are worried about the market’s ability to digest this new glut of supply, especially since the Federal Reserve has pledged to buy an unlimited quantity of government debt.