Bond Report: Treasury yields stay low as economic worries keep bond-market bid

Bond Report

U.S. Treasury yields edged lower on Friday as ongoing uncertainty about the economic impact of the COVID-19 pandemic helped to keep the bond-market anchored.

What are Treasurys doing?

The 10-year Treasury note yield
BX:TMUBMUSD10Y
fell 0.7 basis point to 0.604%, while the 2-year note rate
BX:TMUBMUSD02Y
was also down 0.7 basis point to 0.212%. The 30-year bond yield
BX:TMUBMUSD30Y
ticked 1.2 basis points lower to 1.191%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

Investors will closely eye any reopening of the U.S. and other overseas economies as they get over the worst of the COVID-19 pandemic. While a removal of lockdowns will spur a rebound in consumer and industrial activity, analysts remain unsure what a return to normal will look like. This uncertainty has driven haven inflows into government bonds, keeping them pinned at the lowest yield levels in years.

Treasury prices have also gained as worries around economic growth take a toll on inflation expectations, a corrosive influence on the value of a bond’s fixed-interest payments.

A gauge of inflation expectations over the next decade among holders of Treasury inflation-protected securities
US:TIP
stood at 1.10%, well below the Federal Reserve’s target of 2%.

Data on Friday pointed to a U.S. economy already in recession. Durable goods orders slumped by 14.4% in March, as consumers curtailed their purchases of big-ticket items like cars. This remains the second biggest drop in history. Meanwhile, the University of Michigan’s consumer sentiment index fell to 71.8 in April, from 89.1 in March.

Former Minneapolis Fed President Narayana Kocherlakota advocated for the central bank to push its policy interest rate into negative territory for the first time in history to stimulate economic growth and job creation.

Italian government bond-markets were also in the spotlight ahead of an impending review of its creditworthiness by rating agencies which are expected to downgrade the country’s debt to below investment-grade or junk.

The yield for the 10-year Italian government bond
BX:TMBMKIT-10Y
tumbled 13 basis points to 1.86%, Tradeweb data show.

What did market participants’ say?

“If you look at inflation markets, it’s saying things aren’t looking so hot for the economy,” said Tim Magnusson, senior portfolio manager at Garda Capital Partners, who trades Treasury inflation-protected securities.

“It does look at least that we are getting to a point in major economies where we are seeing a peak and have seen a peak in the new daily cases, or a peak in new daily fatalities. Maybe we’re reaching a point where it’s getting worse at a decreasing rate,” Nathan Sheets, chief economist for PGIM Fixed Income, told MarketWatch.

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