(Bloomberg) — The real produce on 10-year Treasuries has fallen to a record low as concerns mount over the outlook for economic growth even as investor inflows fueled appetite for inflation-linked debt.
The real rate, which excludes the expected impact of inflation over the next decade, fell by as much as six basis points to -1.13%. The move was exacerbated by a lack of trading liquidity, with the 10-year burst-even rate – the market proxy for the projected average annual rate of consumer price gains over the next decade – exceeding 2.41% on Monday following big inflows into the world’s largest-traded fund. The stock market is linked to inflation bonds.
While the shift in inflation expectations has been significant, the continued decline in real yields indicates that investor sentiment continues to deteriorate amid the rapid spread of the delta variant of the coronavirus that threatens to derail economic recovery.
“We are in a slowing growth regime in the United States, where the recovery becomes more mature and a broader base, while inflationary pressures build up,” said Peter Chatwell, Head of Multiple Asset Strategy at Mizuho International Plc.
Market concerns are piling up ahead of the Federal Reserve’s decision on Wednesday, as officials will discuss expectations for more monetary stimulus. Traders lowered expectations of tightening policy at the meeting, even following inflation accelerated at the fastest pace in more than a decade final month on an annual basis. These moves also helped investors invest in safe haven assets following the sudden blow to business confidence in Germany.
In an interview on Bloomberg TV, Michael Kuchma, chief investment officer at Morgan Stanley Investment Management, said real yields could touch unused lows if the Fed remains committed to keeping monetary policy unchanged.
“The more they shove forward their coming guidance on when to hoist prices — and how quickly — to hoist prices, yields can remain low, and if inflation remains lofty, real returns can persevere to remain very low,” he said.
Monday’s move follows a crackdown on China’s technology sector that temporarily lowered 10-year Treasury yields by nearly six basis points to 1.22% prior closing a basis point higher on the day. Bund yields also rebounded, from a five-month low following the Munich-based Ifo Institute gauge fell to 100.8 from 101.7 in June. Economists in a Bloomberg survey expected an improvement.
Record low real yields along with a bounce in US stock futures later in the day also weighed on the dollar. Bloomberg’s Spot Dollar Index closed 0.2% lower.
The German data has fueled concerns about the economy’s resilience to the delta variable, but there are already concerns that the recent advance appears to have been exaggerated. Antoine Buffett, chief price analyst at ING Groep NV, said he wouldn’t touch German or US debt with a “bargain”.
“Treasury load has decreased and volatility has increased – higher risk and lower return is not a winning combination,” he said.
However, the rise could have continued further. Bond supply is low during the summer months and demand from central banks is lofty, which means investors may snap up whatever they can get.
Imogen Bachara, strategist at NatWest Markets, said the rally “seems to be exaggerated”. “But we may be in that unused range for a few weeks. Markets will want more evidence about the vaccine’s efficacy and the turnaround of cases in the UK and Europe.”
(Adds the ninth paragraph to include the movement of the dollar index.)
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