Government bond yields sink to record low on coronavirus disruption
Government bond yields sunk to fresh historic lows as fears over the impact of the coronavirus epidemic on global growth sent investors rushing to safe haven assets.
Concerns over the outbreak have sent equities tumbling across the globe and pushed the price of several government bonds to historic highs, while yields (which move inversely to prices) plunging to record lows as investors flock to perceived safety of government debt.
UK government bonds hit new records on Friday, with 10-year yields sinking as low as 0.23 per cent as falls on the FTSE erased gains the index made earlier in the week.
Yields on US government bonds, regarded as one of the safest assets in the world, also slid to fresh record lows as traders raised their bets on the US Federal Reserve cutting interest rates again following its shock emergency cut earlier last week.
Although the Fed’s unscheduled cut was intended to calm investor fears over the coronavirus outbreak by demonstrating central banks’ willingness to act, news of the cut panicked many investors, who interpreted it as a sign the impact of Covid-19 would be worse than they were anticipating.
“The volatile reaction of the US stock market to the Fed’s interest-rate cut shows investors’ ambivalence,” said Christian Scherrmann, US economist at asset manager DWS.
“The joy at lower interest rates may have been clouded by fears that the Fed sees greater risks to economic growth than the markets do.”
The 10-year Treasury yield fell to a record low below 0.8 per cent on Friday, while 30-year borrowing costs dropped to a record low of 1.35 per cent.
This puts the 30-year US Treasury bond on course for its biggest daily fall since the depths of the eurozone sovereign debt crisis in 2011.
Meanwhile yields on 10-year German bunds,which were already in negative territory, fell to a record minus 0.732 per cent.
“Investors seeking shelter and betting on aggressive policy cuts have driven the hottest bond rally in years, if not ever,” said Markets.com analyst Neil Wilson.
“There could be further to run lower for yields, but the more investors rush to bonds to greater the risk of a snap back causing even more damage,” he continued.
“The more crowded it gets the less appealing it is, and it won’t take much from these levels… to see the long end come roaring back up. Exposure to interest rate risk is huge, albeit this is one-way traffic right now.”