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Bond yields are still lower as market fears are a "disaster scenario"



Signals of traders on the 10-year cash offer at the Chicago Board of Trade.

Scott Olson | Getty Images

The yields on the bonds are headed south and it seems that it will not stop them for now.

The benchmark 10-year Treasury yield, which affects everything from business loans to home mortgages, spans three years. low and was 1.45% on Wednesday. This is below the 2-year yield of 1.5%, and this movement is a signal of recession.

Yields on 30-year bond liabilities fell to a record low of 1

.91% on Wednesday, as yields around the world moving at an opposite price slide to perennial or record lows. US interest rates have followed a global downward trend, with Japan's 10-year yield falling to a new negative three-year low, and the German 10-year par yield falling to its own record minus-0.72%.

"It's a big trade," said Gregory Farranello, head of US interest rates at Amerivet Securities. "The momentum and trends that are present are quite unwavering. There is nothing that will change me that changes the momentum. We are in the last stages of the summer months. Liquidity is definitely a problem. When you look at the global right now it covers a lot of different and varied things. Today we have the title from the UK; you have this ongoing trade war and this structure of global returns is just continuing to unfold. "

Strategists say the bond market is on the decline between a number of forces and now it is a whirlwind, sucking in investors who have to buy yields that keep getting lower as bond prices go up. Over the last few days, investors have come to believe that there is a very high chance of a trade war between the US and China for a very long time, and probably until the presidential election.

Fear Factors

The global economy is slowing down and there are increasing warning signs that it seems that Europe may be entering a recession. China's slowdown has sent a freeze in emerging market economies, which have seen declines in exports.

The following is political uncertainty, which has become even gloomier in the United Kingdom on Wednesday after Prime Minister Boris Johnson pushed the reopening of parliament to mid-October, limiting debate time and increasing the chances of a Brexit bargain. Sterling fell and the yield of 10-year gold plummeted to its lowest level in three years.

"The disaster scenario is if yields fall dramatically from here," says Michael Schumacher, Wells Fargo's director. "Hypothetically, if the trade situation is escalating, if Hong Kong is likely to go wrong and Brexit seems to be leading to a difficult exit … then what you are likely to get is again a large-scale rally in the Treasury."

"Anyone who makes a solid prediction in this scenario is throwing arrows," he said. After a 10-year yield breaks the psychologically important 1.50% level on Tuesday, Schumacher said investors were looking for the next target in the benchmark at a record low reached in the weeks after Britain voted for Brexit or left the European Union .

"People seem to be fixed at 1.35%," he said.

He told investors that a good place to hide could be in very short-term cash desks. For example, the Ministry of Finance's one-month account brought in 2.06%, well above the rest of the securities. "Why be a hero?"

Many strategists do not expect US bonds to follow the rest of the world in negative yields, but acknowledge that this may happen. The other side of the falling yield story is that bond yields can quickly jump higher if, for example, there is significant progress in the trading situation. But strategists are skeptical that this will happen soon,

"It is clear that the trade war is such a big chunk of it and remains so incredibly unpredictable. Most people think they are elevated to such an extent that it is highly unlikely to get nowhere, "says Ralph Axel, an interest strategist at Bank of America Merrill Lynch. He said people wonder why China will sign a long-term deal with President Donald Trump before the election.

Global Yield Syndrome

Another major factor leading to a decline in yields is the fact that over $ 16 trillion in bonds around the world now have negative yields, and the US financial market has been a magnet for investors seeking profitability as well as safety.

Axel said it had a target of 1.25% for the 10-year, and also expects the 30-year yield to be at this level by the second quarter of next year.

Farranello said that yields were moving lower because buying power from more buyers as investors looked to block profitability. The question is whether the consumer, who holds back the US economy, will start responding to what scares the markets.

"If you are a US consumer, you see market volatility. You don't understand it. They see negative interest rates. You see an inverted yield curve that consumers don't understand, and there is talk of recession," Faranello said. "This can be done at some point and the Federal Reserve has to keep an eye on it."

Next week's data could be important as it includes the monthly employment report next Friday, as well as the production of ISM and PMI , two indicators that signal a slowdown in production

"The yield curve tells us essentially that next year we are looking at zero percent GDP growth. This suggests the front end of the curve. The question is whether the yield curve wins or politicians will can support enough data, "Farranello said. "I have no idea how it will develop, but there is a lot of incredible fear and focus on recession."

Central Banks Behind the Curve

Central banks around the world are reducing rates while their economies are slowing down, and the worry is that they are in a race to the bottom as they protect their currencies. Another worry is that they do not have the ammunition they once had before the financial crisis, as so many have made extraordinary relief efforts or already have super low rates. They also failed to do much in the decade after the financial crisis to fuel inflation.

It is expected that the FR will reduce the percentages by a quarter point when it meets on September 17 and 18.

"I Think The Fed Should Turn To 50 [basis points]. I Think The Fed Should Change The Tone Of The World. Attitudes By September, They Should Hit It. They Should Hit It. They Should Change The Tone. and the psychology of the market. We are currently in a state of vice, "said Faranello.

Even before the Fed meeting, the European Central Bank meets on September 12 and is expected to take action, including an already negative rate and eventual announcement of asset purchases.

"We'll see what the ECB does. They have very bad decisions," Faranello said. "They will probably do a few different things, but the market is not convinced that they have much power to turn the economy around now and you will need to start thinking about fiscal stimulus, but it is a sticky process when you have an alliance [political]. The big problem is that the central banks around the world are simply bullet-free, while the tinges are moving south … You feel that the central bank is putting less power.


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