Bond yields fell to new lows on Monday. Is that good news or bad?
Well, it’s kind of both.
The drop reflects investors’ worries about the damage the coronavirus is doing to the global economy, and their growing expectations that the Federal Reserve will employ some of its financial superpowers in hopes of keeping the economic expansion alive.
The bond market is the larger, mild-mannered cousin of the more theatrical stock market, and bonds don’t move as sharply — the S&P 500 was up 4.6 percent on Monday, after skidding over 11 percent last week.
But when the bond markets move, investors pay attention.
Here’s what to know about what bonds are doing, and what it might mean for the economy.
Why should I care?
Long-term bond prices are determined by the outlooks for economic growth and inflation, which are usually stable. Short-term bonds are more influenced by what investors think the Fed will do with monetary policy.
The United States government borrows using debt with a wide range of maturities, from one-month bills to 30-year bonds. Different kinds of bonds have different buyers with different financial objectives, and some of those bonds play a crucial role in determining the costs of borrowing for corporations and consumers. The rates for a 30-year mortgage, for example, are heavily influenced by yields on Treasury notes.
For the past week, long-term bonds have been flashing a warning light. As the coronavirus spread around the world, and stock markets plunged, bond yields sank to record lows. (By convention, investors in bond markets talk about yields, rather than prices. But really they’re two sides of the same coin. As bond prices rise, yields fall. And vice versa.)
The 10-year Treasury note is a heavily traded bond that serves as a proxy for overall conditions in the bond market. And last Tuesday, its yield hit a record low of 1.33, according to FactSet, eclipsing the mark set during the sharp global economic slowdown of 2015-16.
Since then, it has just kept falling, tumbling to 1.15 on Monday, another new low.
What does that mean?
That tumble in yields, for the most part, was the result of a giant rush for safety among global investors. United States government bonds are considered the safest financial investment you can make — the security blanket of choice for investors worldwide.
That made bond yields a highly visible sign that investors believed economic growth in the United States and around the world would decelerate quickly.
“Global G.D.P. is getting clobbered,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. “That’s what people are focusing on and that’s what the bond market is focusing on.”
What about short-term bonds?
Yields are down for short-term Treasury bills, too. They are not at record lows — yields were zero for years after the 2008 financial crisis — but they are their lowest point since late 2017.
But these bills, essentially government debt due to be repaid soon, move for different reasons than long-term bonds. Buyers snap up short-term debt — driving prices up and yields down — if they believe the Federal Reserve is going to cut interest rates. That would make their bonds more valuable.
By understanding the dynamics of different parts of the Treasury markets, analysts can tease out some of the reasons the bond markets are moving.
Here’s the short version.
Last week, long-term bond yields were falling because people thought the economy was falling off a cliff. This week, they’re still falling — meaning investors are still worried about the health of the economy.
But over the past week, short-term bond yields have been falling even faster — meaning investors expected the Fed to lower rates in hopes of bolstering the economy.
That kind of parallel decline isn’t exactly good news. Investors are worried, but they think help is on the way. The Fed hinted that it would take some action in a statement on Friday afternoon, and central banks elsewhere in the world made similar statements over the weekend. On Monday, reports that finance ministers from the world’s largest economies planned a conference call to discuss the crisis further buoyed investors’ hopes.
“The market is pricing in more cuts,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale in New York. “And that’s generally viewed as a positive for the equity markets.”
Equity markets responded accordingly: Stocks soared on Monday.
What happens next?
Bond markets determine the cost of borrowing money. Borrowed money is the lifeblood of the American economy.
All else being equal, the drop in yields on Treasury bonds — if those low yields endure — should help support the U.S. economy as they filter through to consumers and corporations over the next year.
Treasury yields are the foundation for all sorts of borrowing costs. Mortgage rates could fall to new levels of affordability. Interest rates on car loans could fall. Corporate borrowing could get cheaper.
On the other hand, prices set in financial markets — or by central banks — can’t do anything about a serious outbreak of infectious disease.
If the lives of American consumers are disrupted by the coronavirus, low bond yields — and the cheap borrowing costs they create for consumers — might not be enough to keep the economy rolling.