Bonds hardly needed another excuse to rally.
If the market wasn’t already concerned enough about the outlook for global growth, this week brought fresh evidence to support the contention that while the US economy is still on reasonably sound footing, the rest of the world continues to falter.
Manufacturing PMIs in major economies are mired in contraction and growth data out of the euro-area paints a disconcerting picture. Even in the US, there’s evidence of trouble. The Chicago PMI printed a grievous 44.4 for July, 5 handles below the most pessimistic estimate and a level that signals a recession nearly 90% of the time.
The worse the outlook gets, the convinced markets become that central banks will be forced to respond. Between that expected response and the economic malaise that prompted it, the bid for bonds is insatiable – the duration infatuation unending – the hunt for yield relentless.
Donald Trump’s decision to restart the trade war is gas on the fire. The outlook for global growth and trade has now been thrown further into doubt and the predictable result is a continuation of the bond rally.
On Friday, on the heels of US yields plunging to new “since 2016” lows, 10-year yields in Germany hit -50bp. That is 10bp below the depo rate and a new record low.
When it comes to being Japan, the Japanese have got nothing on the Germans.
Meanwhile, 30-year yields in Germany turned negative for the first time on Friday. That means the entire German curve is now negative.
Germany joins the Swiss and the Danes with totally negative curves. The rally pushed 10-year yields in France to -23bp.
The world’s stock of negative-yielding debt appears poised to hit new highs. Albert Edwards would be proud.