The August slide in the 10-year Treasury yield accelerated on Wednesday to its lowest since 2016 on concerns about the China-U.S. trade war slowing the global economy and following a host of overseas central banks introduced aggressive interest rate cuts.
The yield on the benchmark 10-year Treasury note, used as a benchmark for mortgage rates to auto loans, hit a low of 1.633%, the lowest since October 4, 2016. The yield on the 30-year Treasury bond bottomed at 2.159%, its lowest since July 12, 2016.
Wednesday’s moves in the U.S. Treasury market add to a marked fall in yields for the month. The rate on the 10-year Treasury note is about 40 basis points below its level one month ago, down more than 35 basis points in August alone.
The yield on the German 10-year bund hit a new all-time low of -0.598% while the 30-year bund also hit a record at -0.137%. The U.K. 10-year gilts hit a record low of 0.489%.
The Treasury yield curve also exacerbated its recent flattening and inversion, with the spread between the yield on the 3-month Treasury bill and that of the 10-year Treasury note close to -40 basis points. The spread between the 2-year Treasury yield and the 10-year yield, a longtime recession gauge, hit a low of 7.4 basis points, its lowest level since June 6, 2007.
“The flattening in 2s/10s should be expected in a world of rising global macro risk, coupled with falling forward inflation expectations,” Jon Hill, rates strategist at BMO Capital Markets, wrote to CNBC. “There is an element of fear here that the Fed won’t cut as much as necessary to keep the cycle going and maintain inflation near 2%. This keeps front-end rates elevated while long-tenor yields fall.”
“However, we think eventually this gives way to a more aggressive Fed cutting campaign – even a ‘mid-cycle’ move could easily be in the 100 bp to 125 bp magnitude,” Hill added.
Investors have been rushing into safer assets like U.S. government bonds since last week amid market concerns over U.S.-China relations.
China’s central bank set the official midpoint reference for the yuan at 6.9996 on Wednesday, slightly weaker than what markets anticipated. Beijing allows the yuan to trade within a narrow band of 2% from each day’s midpoint. Its level against the dollar is important given that the lower the currency, the cheaper Chinese products will be when exported.
This comes after the United States declared that China was a currency manipulator – a step that hadn’t been taken since the Clinton administration and escalated tensions among the two countries.
Central banks in India, New Zealand and Thailand surprised investors in overnight trading with aggressive rate cuts as all three nations joined a growing global shift toward easier monetary policy.
The Reserve Bank of New Zealand slashed its official cash rate by 0.5 percentage point to 1%, a steeper reduction than what economists had forecast. Meanwhile, the Reserve Bank of India lowered its benchmark lending rate by 0.35 percentage point to 5.4%, the central bank’s fourth rate reduction of 2019.
“Overnight many central banks cut rates, including New Zealand and this is dragging all yields lower,” Jim Caron, Managing Director of Global Fixed Income at Morgan Stanley Investment Management, told CNBC. “The Fed is lagging this cycle, so it is no surprise” to see the yield curve continue to invert.
The Fed’s decision in July to only cut by 25 basis points “was a policy mistake and they should have gone 50bps,” he added. “The largest central bank in the world, the Fed, needs to lead not follow. It is important they get out ahead of the risks associated with a trade war.”
On the data front, there will be consumer credit figures out at 3 p.m. ET. Traders will monitor a speech by Chicago Fed President Charles Evans at 9:30 a.m. ET. Meanwhile, the U.S. Treasury is set to auction $27 billion in 10-year notes.