What is going on with bond "yields"?!

WED, JUN 19, 2019

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF WED, JUN 19, 2019 • 12:06 ET

DJIA		26496.92
		+0.12%	+31.38

S&P 500		2918.52
		+0.03%	+0.77

NASDAQ		7955.46
		+0.02%	+1.58

EDITOR'S NOTE

Hi everybody! I couldn't help but follow the action in bond yields while I was out, because these moves are insane.

To quickly recap: Mario Draghi, the head of the European Central Bank, came out yesterday morning with some strikingly dovish talk about how more stimulus (rate cuts, bond buying, etc.) could be on the way if the euro zone economy doesn't improve. And whoosh, global bond yields sank to fresh lows.

Yields on global sovereign debt are now so low they barely qualify as "yields" anymore. Both France and Portugal saw their ten-year bond yields immediately fall to zero. Zero!!! For Portugal!!! Remember the PIIGS?! (Portugal's 10-year yielded 16.5% seven years ago.) Germany saw its 10-year yield plunge to -0.3%, a fresh low. Stunning. Japan's 10-year dropped to -0.15%.

Our own 10-year Treasury fell to just barely above 2%, at 2.016%--which, obviously, looks great compared with what everything else is yielding. There's now $12.5 trillion worth of negative-yielding debt globally, per Bloomberg. Sweden and Austria joined the list yesterday after their 10-year bonds turned negative.

Says Ian Lyngen of BMO: "...a question we've been receiving [from clients] is how low could 10-year Treasury yields be 12 months from now? Is it possible to see a 0-handle? The answer is a yes," although, he says, that's too extreme to be their base case. Allrighty then!

This is a remarkable backdrop for the Fed's policy decision today. Goldman is arguing against an "insurance" rate cut, saying the economy isn't weak enough to justify it. Jonathan Golub of Credit Suisse says rate cuts wouldn't even help if it were, arguing lower rates have been "accompanied by declining loan demand and falling money velocity," (emphasis mine) plus higher savings and less business capex.

That's an argument for a different day. For now, it's about whether the bond market has gotten completely out of whack. The TLT, the ETF that tracks longer-term Treasury prices, is well above (9% above) its 200-day moving average, per Instinet--much like we saw in 2016, when the 10-year yield bottomed below 1.5%.

Why do people keep buying these rock-bottom yields? Among other factors (slowdown fears, positive "real" yields, pension matching), because it's been lucrative! Remember, the flip side of yields is prices--which keep going up, up, up, making bonds nearly as hot as the IPO market right now.

As Deutsche's Torsten Slok points out, Australia's 100-year bond is up 40% (!!) since last October, versus the S&P 500 being basically flat. Junk (err, "high yield") bonds are up more than 9% so far this year, their best start since 2009.

Sure sounds a little frothy to me! See you at 1 p.m. as we kick off our coverage of the big Fed decision,

Kelly

Kelly Evans

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