Treasury Yields Hit Record Lows – Global Flight To Safety

It is so, so tempting to write about Hillary Clinton’s latest news today that I can hardly stand it. We had Bill Clinton’s “chance” meeting with Attorney General Loretta Lynch at the Phoenix airport last Thursday. Then the FBI finally interviewed Hillary on the Saturday of 4th of July weekend — very strange.

Then on Tuesday morning FBI Director James Comey called an unscheduled press conference to tell the world specifically how Hillary broke laws, jeopardized national security and lied about it for over a year — but then recommended no charges be filed against her. He claimed that no one in government, outside of the FBI, knew what he was going to say in advance. Yeah, right!

While he was speaking, President Obama and Hillary were flying on Air Force One to a campaign stop in North Carolina. There’s no way that would have happened if Hillary was going to be indicted. Obama knew Hillary would need some help after Comey blasted her, so he agreed last week to campaign with her this week.

Clearly, the fix was in! This is disgusting but, sadly, most Americans probably don’t care.

I’ll leave it there for now. For a good counter to the FBI’s decision not to recommend charges against Hillary, read this Wall Street Journal article from yesterday.

Now on to our topic today, US Treasury yields fell to record lows this week as global uncertainty remains high in the wake of the UK’s “Brexit” decision and growing fears about European banks. Investors worldwide flocked to the safety of US Treasury securities, citing fears of a global recession sparked by a widely expected economic slowdown in Great Britain – which may or may not happen.

The 10-year Treasury Note plunged to below 1.37% intra-day on Tuesday, an all-time low. The yield on the 30-year Treasury Bond fell to 2.14% on Tuesday as well, also a record low. The yield on the UK 10-year bond (gilt) fell to a record low of 0.78% on Tuesday, while the 10-year German bund yield tumbled to negative 0.18%.

YIELD ON 10-YEAR TREASURY NOTE HITS RECORD LOW

Figure1

Despite the new record lows in yields for US Treasury securities, demand remains huge, especially in the wake of Brexit. Here are just some of the reasons for this demand:

  1. Foreign yields are even lower.While earning roughly 1.37% per year on cash invested with Uncle Sam for 10 years is the lowest return on record, it is still a better return than investors can get investing in bonds issued by most other developed nations.
  2. Flight from risk. Government bonds are the place investors run to when they are worried, and following the Brexit vote, this time is no different. Some bond analysts now feel the 10-year yield could go to 1.25% near-term and perhaps to 1.0% over time.
  3. Central bank rate hikes unlikely. The prospect of another Federal Reserve interest rate hike, which was expected to come as early as last month, now looks like it won’t come for some time, given current market worries over a global recession.

In a note released earlier this week, interest rate strategists at Bank of America Merrill Lynch (BAML) predicted that ultra-low interest rates are the “new normal” in global markets.

More specifically, they reported that of the government bonds offered by developed countries, apprx. 33% now trade at negative yields. Likewise, they reported that the US makes up nearly50% of positive-yielding government bonds now available to investors worldwide. I’ve not seen such numbers before, but if true, it helps explain why Treasury yields are so low.

The BAML analysts also point out that European and Japanese investors are being pushed out of their domestic sovereign bond markets by their own central banks that are gobbling up bonds as part of their quantitative easing (QE) programs. Those investors are increasingly eyeing US Treasuries.

For all these reasons, the BAML analysts predict that US Treasury yields will continue to fall. But keep in mind that, while most market forecasters are predicting that Treasury yields will continue moving lower, buying bonds at today’s record high prices is a very high risk play. If concerns over Brexit fade, as I expect they will, demand for Treasuries could cool off quickly and rates could snap higher. CAVEAT EMPTOR.





Posted 07-12-2016 6:19 PM by Gary D. Halbert
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