How Treasury Yields Could Fall Below Zero

Alexandra Scaggs Markets Now Treasuries BMO.T GS BMO European Central Bank Federal Reserve Goldman Sachs BMO Capital Markets ICE Banking Banking/Credit Financial Services Ian Lyngen North America United States Monetary Policy Interest Rates Economic News Debt/Bond Markets Commodity/Financial Market News Content Types Factiva Filters C&E Exclusion Filter BMO BMO.T G/FED GS I/BNK M/FCL N/BON N/DJN N/DSR N/ECB N/EMP N/GENI N/IEN N/MKT N/WER R/NME R/US Barrons.com Barrons Blogs Wires CODES_REVIEWED Bonds Coronavirus Markets Now Markets Treasuries US author Alexandra Scaggs author|Alexandra Scaggs topicid 8576 name Alexandra Scaggs extractedtext Alexandra Scaggs rank 1 codetype author code alexandra_scaggs nameformat surname_first author Alexandra Scaggs id Alexandra Scaggs barrons_display_brand BARMKTNOW barrons_display_brand|BARMKTNOW codetype BARRONS_DISPLAY_BRAND canbedisplaybrand true value BARMKTNOW source MANUAL status modified name Markets Now code BARMKTNOW barrons_display_subject 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It’s Possible. first_publish_headline|Could Treasury Yields Fall Below Zero? It’s Possible. flow NWREGULAR flow|NWREGULAR codetype FLOW value NWREGULAR source MANUAL status modified name Wires code NWREGULAR flow Barrons.com flow|Barrons.com codetype FLOW value Barrons.com source MANUAL status modified name Barrons.com code online name Online title Product code Barrons.com flow Barrons Blogs flow|Barrons Blogs codetype FLOW value Barrons Blogs title Product source MANUAL status modified name Barrons Blogs code Barrons_Blogs headline Could Treasury Yields Fall Below Zero? It’s Possible. headline|Could Treasury Yields Fall Below Zero? 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It’s Possible. Could Treasury Yields Fall Below Zero? It’s Possible. Could Treasury Yields Fall Below Zero? It’s Possible.

Even if the Federal Reserve doesn’t employ a negative interest-rate policy, global demand for U.S. debt could pull short-term Treasury yields below zero in coming years.

Could Treasury Yields Fall Below Zero? It’s Possible.

Even if the Federal Reserve doesn’t employ a negative interest-rate policy, global demand for U.S. debt could pull short-term Treasury yields below zero in coming years.

How Treasury Yields Could Fall Below Zero

Even if the Federal Reserve doesn’t employ a negative interest-rate policy, global demand for U.S. debt could pull short-term Treasury yields below zero in coming years.

https://www.barrons.com/articles/the-fed-just-cut-interest-rates-get-ready-to-refinance-your-mortgage-51583267554?mod=hp_DAY_2 https://www.barrons.com/articles/the-fed-just-cut-rates-what-we-really-need-is-a-pothole-fix-51583319601 https://www.barrons.com/articles/the-dow-is-up-900-points-after-congress-agrees-on-8-3-billion-package-to-battle-coronavirus-51583350527 https://asset.barrons.com/dynamic-insets/charts/cdc_0093a669d3bb0f698504a505.json https://www.barrons.com/articles/the-10-year-treasury-yield-fell-below-1-for-the-first-time-ever-what-that-means-51583267310 mailto:alexandra.scaggs@barrons.com Could Treasury Yields Fall Below Zero? It’s Possible. By Alexandra Scaggs Photograph by Eva Hambach/Getty Images

Even if the Federal Reserve doesn’t employ a negative interest-rate policy, global demand for U.S. debt could pull short-term Treasury yields below zero in coming years.

More than $13 trillion of global bonds have negative yields, according to ICE BofAML Indices. In other words, investors are agreeing to take small losses to stash their money.

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Most of that debt was sold in Europe and Japan, where central banks have set interest rates below zero. German and Swiss government bonds are trading with negative yields out to 30-year maturities, and Japanese bonds are trading with negative yields out to the 10-year maturity.

But the U.S. could join that group of countries in the next few years, says Ian Lyngen, head of U.S. rates strategy with BMO Capital Markets. “Given the global rates backdrop it is well within the realm of conceivable outcomes to have negative front-end yields,” he wrote in a March 4 note.

Until recently, Federal Reserve policies had created a large (and persistent) gap between bond yields in the U.S. and other haven markets. That stoked demand for dollar-denominated assets among global investors who were still looking to earn returns. The resulting influx of cash into U.S. markets strengthened the dollar versus other major currencies, helping keep inflation low even as the U.S. economy grew.

https://asset.barrons.com/dynamic-insets/charts/cdc_0093a669d3bb0f698504a505.json

The Fed’s surprise decision to cut rates by 50 basis points—or half of a percentage point—signals a reversal of the strong-dollar trend. Benchmark 10-year Treasury yields have dropped below 1%, for the first time ever, since Tuesday’s rate cut; they were trading at 0.97% midmorning Wednesday.

Wall Street widely agrees that interest rates will fall further. Strategists at BMO and Goldman Sachs expect the U.S. central bank will cut rates by another 50 basis points in the first half of this year, for example. That would leave the Fed targeting an overnight policy rate between 0.5% and 0.75%.

That also raises some interesting questions about short-term Treasury yields. If they fell exactly as far as interest rates, they would end up pretty close to zero. (The two-year note was yielding 0.61% in recent trading, so in that scenario it would yield just 0.11%.)

Of course, it is unlikely that two-year Treasury yields will fall exactly as far as interest rates. Instead, their yields will depend on the outlook for the U.S. economy after the Fed is finished cutting rates.

If it looks like the coronavirus won’t have a sizeable effect on economic growth—or if a slowdown is averted by the Fed—two-year Treasury yields will likely trade at a level that’s higher than the central bank’s policy rate. That is because investors will feel more comfortable investing in riskier markets and will put money into those instead of short-term Treasuries.

On the other hand, if the U.S. economy tips into recession, two-year yields could fall below the Fed’s target range. In that case, investors expect the Fed to cut rates to zero and expand its purchases of Treasuries.

If investors can count on the Fed to buy Treasuries, they may not mind buying U.S. bonds with negative yields. That is part of the dynamic driving interest rates lower in Europe: The European Central Bank is buying bonds in size.

The ECB has cut rates below zero, but BMO Capital Markets’s Lyngen doesn’t expect the Fed to follow suit. So investors should still expect some gap to persist between yields on global bonds and Treasuries.

Specifically, the ECB’s negative interest rates have helped push 30-year German and Swiss bond yields below zero. That probably won’t happen in the U.S., Lyngen says.

That probably won’t provide much comfort for yield-hungry investors—even if shorter-term Treasuries don’t fall below zero. Goldman Sachs expects the U.S. economy to recover in the second half of this year, but predicts that the 10-year yield will fall as low as 0.85% before then.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.