Traders amped up bets on Federal Reserve interest-rate cuts this year and Treasuries surged as investors around the world sought the safety of bonds amid increasing concern about a slowdown in global growth.
Fed funds futures are now pricing in more than 30 basis points of easing by the end of 2019, suggesting at least one quarter-point cut and possibly more. Benchmark 10-year yields tumbled to their lowest level since December 2017, touching 2.35 percent.
A surprise move by New Zealand’s central bank to signal that its next shift would likely be a cut also stoked gains in global bonds. Meanwhile, Germany’s benchmark yield slid further below zero after the nation sold 10-year notes at a negative rate for the first time since 2016.
“There are lingering concerns about the growth prospects in the U.S.,” said Alex Li, head of U.S. rates strategy at Credit Agricole SA. “Investors’ mindset has changed after the Fed last week revised their growth forecasts and removed all the rate-hike dots for 2019.”
Given benchmark 10-year yields have now broken below a range that had held since the start of the year, Li is advising investors to step to the sidelines and not try to fight the current trend.
Money-market traders continue to extend the amount of Fed easing they foresee this year, predicting the central bank will reverse course on policy even as officials have signaled only that they’ll stand pat on rates. The implied rate on fed funds futures that expire in January 2020 has fallen from 2.14 percent on Tuesday to 2.09 percent. That compares to the overnight benchmark targeted by the Fed, which currently stands at 2.40 percent, and implies more than one full cut is priced in for this year.
Reverse Course?
One potential policy maker who appears willing to push toward easing is Stephen Moore, who U.S. President Donald Trump may nominate for a seat on the Federal Reserve Board. He told the New York Times in an interview that the central bank should immediately reverse course and lower interest rates by half a percentage point.
Monetary policy in Europe appears poised to support global debt as well. European Central Bank President Mario Draghi said the risks to the euro area are tilted to the downside, while any pickup in inflation is delayed.
“The race to the bottom continues for government bond yields,” Fawad Razaqzada, a technical analyst at Forex.com, wrote in a note. “Central banks have turned dovish in recent months owing to evidence of a slowing global economy.”
Haven demand was also spurred by some concerns in emerging markets, with the Turkish lira plunging as traders grappled with the government’s curbs on trading the currency. Developing-market stocks slipped, although U.S. and European shares managed to eke out small gains.