(Bloomberg) -- The entire U.S. yield curve fell below 1% for the first time in history as rising expectations that the Federal Reserve will cut policy rates to zero in the coming months drove investors to reach for longer-dated securities.
Traders are pricing in about 80 basis points of cuts in March, and 100 basis points by July, which would drag borrowing costs down to zero. Those bets fueled a rally in U.S. Treasuries, with the rate on 30-year bonds diving as much as 59 basis points. Benchmark U.K. bond yields tumbled below zero for the first time, Germany’s two-year bonds and rates in Australia and New Zealand fell to new lows.
The latest frenzy in markets, spurred by concerns over an oil price war between the world’s biggest exporters, prompted the New York Fed to say it will boost the size of this week’s overnight and term repo operations to ensure reserves are ample and reduce the risk of pressures in money markets.
“The more I think about it, the more it makes sense to me that the U.S. cash rate will fall below zero some time very, very soon,” said Chris Rands, portfolio manager at Nikko Asset Management Ltd. in Sydney. “I wouldn’t be surprised if the U.S. tries negative rates, especially with the tailspin in oil now adding to the virus fears.”
The spread of the coronavirus and its fallout on supply chains and consumer spending have seen a dramatic repricing of global interest-rate expectations in the past month. The jolt lower in oil from the price war will sap inflation.
Rush to Safety
The stampede for Treasuries comes after a weekend dominated by crisis headlines including the oil price-war, plunging Chinese exports and Italy’s virus-induced lockdown. Adding to the sense of malaise, Japan posted its biggest economic contraction in more than five years, while France said its economy may barely expand.
Risk assets plunged with S&P 500 futures dropping about 5% to hit circuit breakers, and European stocks plunged by the most since 2016, putting the STOXX Europe 600 Index on course for a bear market. Commodity-linked currencies weakened, with Norway’s krone and Canada's dollar falling at least 1.9% against the U.S. dollar. Italian bonds plunged, sending the yield on 10-year debt to 1.3%.
Meanwhile, the yen and the euro strengthened. And the dollar, which suffered its worst week in two years, was up 0.2%, as soaring demand for U.S. Treasuries canceled out concerns that more Fed cuts would hurt the greenback’s appeal. The dollar has an edge over its peers by being the world’s reserve currency of choice.
On a Tear
Treasuries, the world’s deepest pool of haven assets, have been rallying in the past few weeks as the virus wreaked havoc across the globe. Federal Reserve Chairman Jerome Powell surprised markets last week with an emergency rate cut of 50 basis points, raising the specter that the virus fallout will be longer and worse than anticipated.
The yield on 10-year bonds dropped as much as 45 basis points to 0.31%, before settling at 0.4% as of 11:43 a.m. in London. Most of the German curve is now trading under negative 0.55%, which, together with the euro’s advance, may give the European Central Bank food for thought when it decides on interest rates this week.
“We know what the financial crisis looked like, the tech wreck, but this bond rally we’re seeing is just unchartered waters,” said Stephen Miller, adviser at GSFM, a unit of Canada’s CI Financial Group. “A global recession is now a probability, not a possibility.”
Central Bank Action
Federal Reserve Bank of Boston President Eric Rosengren said Friday that policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.
And money managers are expecting the Reserve Bank of Australia to turn to QE as soon as the middle of the year, while bets are increasing for the Bank of Japan to ease this month.
“The market is panicking,” said Shinji Hiramatsu, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co. in Tokyo. “Position adjustment, loss-cut buying and all sorts of buying are emerging. Everybody’s buying Treasuries.”