Yields across developed markets tumbled to unprecedented lows as a worsening trade dispute between the U.S. and China spurred bets that central banks will need to cut rates more aggressively.
German and U.K. yields fell to fresh record lows, taking their cue from U.S. Treasury yields that led a global decline after China let the yuan slide Monday and asked state companies to suspend imports of U.S. agricultural products.
China’s decisions reverberated across markets as a weakening of the yuan past the 7 per dollar mark spurred speculation of a full-fledged currency war. The yuan’s decline reflects expectations of additional U.S. tariffs on Chinese goods, and doesn’t mean it won’t rebound, the People’s Bank of China said in a statement.
In Europe, prospects of more policy easing are being under-priced by markets, according to strategists at ING Bank NV, including Padhraic Garvey, who see longer-maturity bonds “increasingly benefit” as larger parts of the bund curve drop below the European Central Bank’s deposit rate of -0.40%. Money markets are pricing in around a 30-basis point cut by the ECB by December 2020 and 100 basis points by the Fed.
“Trade headlines and China suggesting that the currency could be part of the retaliatory response sparked a global risk-off rally,” Garvey wrote in a client note. “In general we remain bullish, as further easing is still in store. In the euro zone quantitative easing does not appear to be fully in the priced yet.”
Benchmark 10-year Treasury yields declined as much as eight basis points to 1.76%, the lowest level in three years. Germany’s benchmark yield fell four basis points to as low as -0.536% as the nation’s services PMI for July came in weaker than forecast.
Ireland’s 10-year yield dipped below zero for the first time while U.K. gilt yields touched an all-time low of 0.499%.
Swap markets show traders now expect the Fed to cut its benchmark rate a quarter point more than what was priced in after the FOMC’s meeting last week.
“Central bank intervention including from the Fed will likely ramp up as PMIs around the world continue to tumble in the wake of the trade war,” said George Boubouras, director at Salter Brothers Asset Management Pty in Melbourne. “Treasury yields are going to head lower by year-end as we see fresh downgrades of global growth.”