Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

NEW YORK (Capital Markets in Africa) – Benchmark Treasuries enter the coming week with yields plumbing their 2019 lows, leaving bond bulls emboldened as the standoff between the U.S. and China drags on.

With a trade deal between the world’s two largest economies moving further out of view just as global economic growth is ebbing, and political angst building in Europe, Treasuries are exerting a magnetic pull for investors seeking safety.

Short-term yields are hovering at the lowest in over a year as confidence grows that the Federal Reserve will cut interest rates before January, while those on longer maturities have barely been lower in 2019. With Beijing appearing less willing to resume talks with the U.S. administration, it all brings into question the Wall Street consensus that 10-year yields will end the yearhigher.

“I’m really pessimistic about there being any trade deal,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “This is likely to be a concern in the market for much of the remainder of this year, and that could detract from expectations for growth. I can see the market maintaining these low yields.”

The benchmark 10-year yield is set to begin the week at 2.39%, compared with its 2019 low of 2.34%, set in March. Two-year yields touched about 2.14% on May 15, the lowest since February 2018. Yields on German sovereign debt are in a downward spiral as well.

China’s state media at the end of the week signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs. The darkening mood supports lower rates and a steeper yield curve, Bank of America Corp., strategists Bruno Braizinha and Ralph Axel wrote in a note Friday.

Read more on the global demand for the safety of U.S. Treasuries

There’s little relief in sight when it comes to trade angst. Traders may have to wait until the next opportunity for U.S. President Donald Trump and Chinese President Xi Jinping to meet — at the Group-of-20 gathering in Japan next month.

Insight Ahead
Next week, traders will gain fresh insight into the state of America’s housing market and purchases of big-ticket items. Minutes from the Fed’s last gathering will be released Wednesday and there’s a slew of speakers, including Chairman Jerome Powell. There’s little expectation that officials will waver from their pledge of patience with rates.

“The Fed will look at the tariffs as an exogenous shock and that it’s not systemic and therefore won’t change monetary policy,” said David Kotok, chief investment officer at Cumberland Advisors, which manages about $3 billion.

Fed funds futures imply the central bank’s benchmark rate will fall to 2.09% by the end of 2019, signifying more than a quarter-point cut. Officials’ most recent quarterly forecasts projected no change in 2019 and a quarter-point increase in 2020.

Given the Fed’s plans for rates and elevated Treasury issuance, Kotok says yields are too low. He expects the 10-year yield to be at 3% to 3.25% by year-end.

Still, the daily ebb and flow of information about tariffs is seen as pivotal.

“There is more risk of yields going lower given the concerns about trade,” said Justin Lederer, a strategist at Cantor Fitzgerald.