Obviously, the thesis that governments across the world had the virus under control didn’t hold up, so stocks, bonds, gold and other assets need to price in that reality. Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett may declare that lending at 1.4% “makes no sense,” but most others need to heed John Maynard Keynes’s advice that “the market can stay irrational longer than you can stay solvent.” Speculators increased their bets against long bonds in the week ended Feb. 18, according to Commodity Futures Trading Commission data released Feb. 21. That was an uncomfortable position last week; it’s downright unbearable today.
Rates strategists at NatWest Markets advocated a balanced approach to Treasuries last month when yields were tumbling: Sell a bit if you want, but keep your core position in tact. That turned out to be the right move. Here’s what John Briggs, Blake Gwinn, John Roberts and Brian Daingerfield had to say this time around:
“Yes, the bond market can and will likely over-react, but we are not yet at the time to have that discussion. With the spread of the virus into Europe, a whole new round of investor uncertainty can be unleashed, and that is what I think we are witnessing now.
Until we get some clarity on how to gauge the eventual economic impact off the virus, uncertainty will remain and yields will stay low. I know we’ve been a month-long broken record in this space: but even if you disagree with us, we caution that in the very least you just can’t be short Treasuries until we get more clarity, and in our view, you need to continue to hold core longs.”
In other words, no record-low yield level is safe. Investors just want to own Treasuries and shed stocks.
Part of the reason for that might be because analysts are openly pondering whether central banks have the power to stave off a supply shock like the coronavirus. NatWest strategists wrote that “faith in the Fed bailing out equities should be questioned not because that’s what they tend to do, but because what they can do doesn’t do anything to fix the cause.” Jim Vogel at FHN Financial argued that geopolitical failures are “beyond the immediate reach of monetary policy.” Of course, that doesn’t mean the Fed and its peers won’t try to cure the world with lower interest rates.
That, in turn, most likely means persistently low bond yields for the immediate future. It doesn’t feel good to buy U.S. Treasuries right now. But it didn’t a month ago, either.
This article was provided by Bloomberg News.