Fear and uncertainty about the global economy are leading investors to embrace the relative safety of U.S. government debt and slashing yields to record lows.
Interest paid on the 10-year Treasury note reached 1.34 per cent early Wednesday, just below the previous record set in 2012. Historically, when concerns have flared about a potential recession, investors have shifted money into havens such as U.S. Treasurys and sent yields falling.
The market’s signal this time seems somewhat hazier than usual, and there’s far from any consensus among economists that a recession is approaching.
As recently as the start of June, the yield on the Treasury note was 1.85 per cent. Then the U.S. government issued an anemic May jobs report. And Britain voted to abandon the European Union — a move that caught markets off guard and magnified concerns about the global economic order.
What makes the record-low Treasury yield something of an oddity is that the U.S. economy — the world’s largest — still looks relatively sturdy, far more so than most other major economies. But yields on other nations’ debt are even lower. Yields on German and Japanese debt, for example, are negative. So foreign investors still get a smidgen of a return by buying Treasury notes.
All those factors have raised a host of questions: Are investors bracing for a global downturn? Will the United States remain an economic haven and benefit from the influx of capital? Does U.S. debt simply deliver a better return than foreign debt? Might inflation veer closer to zero?
In this case, the answer might be all of the above.
“There are a lot of factors conspiring to push the yield down to unprecedented levels,” said David Joy, chief markets strategist at Ameriprise Financial.
Other market analysts detect newfound signs of caution. They see uncertain investors seeking to shield themselves from the risks of the unknown.
“There’s just generally a feeling that (investors) want to be in some kind of safety,” said Tom di Galoma, managing director at Seaport Holdings. “I think we’re going to see lower yields across the globe.”
Those lower yields will help some corners of the U.S. economy. Mortgage rates, for example, generally track shifts in 10-year Treasury notes. So homebuyers will likely be able to borrow more cheaply. The real estate firm Zillow reported 30-year fixed mortgage rates of around 3.40 per cent Tuesday, near the all-time average weekly lows.
The falling yields might also help lead the Federal Reserve to delay a long-awaited resumption in short-term rate hikes. The central bank cut its key short-term rate to a record low near zero in 2008 to try to rejuvenate an economy paralyzed by the Great Recession.
Economic growth had recovered just enough late last year for the Fed to raise rates modestly. But the Fed has held off on a second hike as the economic outlook has grown uncertain and other major central banks have continued to stimulate their economies.
The flow of money into U.S. Treasurys has also served to raise the value of the dollar against other currencies. This helps hold down inflation, because a stronger dollar makes imports less expensive. But it also hurts U.S. exporters, whose goods become costlier overseas.
John Canally, chief economic strategist at LPL Financial, attributed much of the decline in U.S. yields to foreign investors. He thinks the U.S. economy remains insulated for now from any global downturn.
The next big test for 10-year yields will be Friday’s monthly jobs report. Economists have estimated that employers added 180,000 jobs in June after a dismal gain of just 38,000 in May and a still-tepid 123,000 in April. Stronger job growth could assuage any anxieties about the U.S. economy and renew speculation about when the Fed might resume raising rates.
The “data will tell us if the April and May slowdown in jobs was a sign of things to come or an anomaly,” Canally said.
— The Associated Press Business Writer Marley Jay contributed to this report from New York