WSJ: U.S. Government Bond Prices Soar on Flight to Safety
Yields on benchmark U.S. government bonds tumbled below 2% for the first time since April on Monday as a deepening turmoil in global stocks and crude oil markets boosted demand for haven assets.
The flight for safety has been gathering speed over the past few weeks, underscoring growing anxiety over China’s slowing economy and its stock market rout, which has rippled through markets globally and clouded the global economic outlook.
The uncertainty over whether the Federal Reserve will raise interest rates next month or wait longer to act have contributed to growing volatility in riskier assets, driving many to shed their risk appetites and shift focus to preserve capital.
On Monday, European stocks and U.S. stock futures fell sharply as a rout in Chinese shares accelerated, wiping out gains for the year. U.S. oil prices tumbled over 4% and fell further below $40 a barrel. As investors sought shelter in Treasury debt, the yield on the benchmark 10-year Treasury note fell to as low as 1.957%, the lowest intraday level since April 28, according to Tradeweb.
The yield, a foundation for global finance and a key indicator of investors’ sentiment toward growth and inflation, was recently at 1.986%, compared with 2.052% Friday. Yields fall as prices rise.
Over the past two months, anxiety has been growing over the global economy amid lower commodities prices, plunging emerging-market assets and a selloff in both stocks and bonds sold by lower-rated U.S. companies, known as junk bonds.
China’s surprising move to devalue the yuan earlier this month amid tumbling exports heightened concerns over the pace of the world’s second-largest economy, which has been a big buyer of commodities, including iron ore, copper and oil. Last Friday, a report showed a gauge of China’s manufacturing sector dropped to its lowest level in 6½ years.
The growing turmoil in the financial markets is complicating the Fed’s plan to raise interest rates for the first time since 2006. The U.S. economy has been strengthening after a soft patch earlier this year. Solid jobs growth has bolstered the case for the Federal Reserve to start moving away from crisis-era monetary stimulus. The Fed’s ultraloose monetary policy has boosted prices of a wide range of financial assets over the past years and now investors are concerned whether these assets may fall in value once the Fed shifts gears into a tightening mode.
The nonfarm jobs report for August is due to be released in early September. Analysts say a strong report may allow the central bank to act at its Sept. 16-17 policy meeting. Yet many investors say global uncertainties and rising volatility in many asset markets could make the Fed wait longer to act. They are concerned that a rate increase could jolt sentiment and roil already jumpy markets.
Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Monday that investors and traders see a 28% likelihood of a rate increase at the September 2015 meeting, according to data from the CME Group. A couple of weeks ago, the odds were around 50%.
As expectations on the Fed to tighten next month pulled back, the yield on the two-year Treasury note fell to 0.584% Monday from 0.629% Friday. The yield is highly sensitive to changes in the Fed’s interest rate policy outlook.
Yields on long-term bonds such as the 10-year notes and 30-year bonds are more sensitive to changes in global growth and inflation outlook. Inflation chips away bonds’ fixed return over time and it is a main threat to long-term bonds.
The Fed is also grappling with the fallout from plunging crude-oil prices. While lower energy prices are a boon for U.S. consumers, they have reduced inflation expectations, which makes it more difficult for the Fed to meet its 2% target.
The break-even rate, or the differential between the benchmark 10-year Treasury note and the 10-year Treasury inflation protected security, was 1.49 percentage points Friday, the lowest level since 2009.
The level suggests that investors expect the U.S. inflation rate to be running at an annualized 1.49% on average within a decade. A month ago, the reading was above 1.8%.
