“Investors want to be long US Treasurys”, a random analyst told Bloomberg TV on Tuesday evening, regurgitating what is, by now, a boilerplate line equally applicable on almost any given day.
In the hours between the US close and the Asia open, I keep the talking heads on mute. The “long Treasurys” bit was a chyron, superimposed below a young woman from Saxo. Her remarks came on the heels of a predictable session in the US, where stocks stumbled a bit on Apple’s revenue warning, and bonds were bid. The curve bull flattened.
Bloomberg’s summary of the action was so familiar that it could apply to any number of days in 2020. “Yields ended lower across the curve with long- end led gains flattening [the] 2s10s [and] 5s30s”, one daily recap reads. The 10-year is sitting back near 1.55%. 30-year yields fell below 2% at one point.
For lack of a better way to describe the situation, we are stuck in coronavirus no man’s land. Yields are in a range, hostage to headlines about something traders have no expertise in assessing: Deadly respiratory illnesses.
Q4’s reflation optimism and pro-cyclical rotation (accompanied as it was by a bear steepener) was already in serious doubt by the time the epidemic came calling. Now, yields are going to be rangebound until there’s real clarity on how things are going to evolve.
Days like Tuesday – when the most important corporation on the planet in many respects says the virus will make it impossible to hit revenue guidance issued just weeks ago – mean the “investors want to own US Treasurys” boilerplate language is just reinforced.
“We’re comfortable concluding the situation has evolved from a brief interruption of the improving global growth outlook to a far more impactful negative influence on economic expectations”, BMO’s Ian Lyngen, Jon Hill and Benjamin Jeffery wrote Tuesday, adding that although “the initial operating assumption has been that any detraction from Q1 GDP, both domestically and overseas, [would] be a temporary phenomenon ultimately resolved via a rebound in Q2, this has become a dated paradigm”.
It sure has, guys. And that’s not me positing some kind of “dystopian Hollywood” scenario, as described in Rabobank’s worst-case. Rather, it’s just a reflection of the fact that, as I’ve been gently suggesting for weeks, the economic impact of the virus is likely to manifest itself in similar ways as the trade war (e.g., supply chain disruptions and big hits to economic bellwethers, both at the company- and country-levels). That means that locales which suffered heavily during the worst days of the trade war (e.g., Germany, China, South Korea, etc.) are facing an “out of the frying pan and into the fire” situation.
And so, here we are back in “duration infatuation” mode, with US yields looking back to August for inspiration. The latest edition of BofA’s closely-watched global fund manager survey showed a capitulation into deflation trades. Last Thursday, the bank’s Michael Hartnett talked of a “$1 trillion bond bubble”, after the week through February 12 saw the largest ever inflow into bond funds (it annualizes to nearly 13 figures – see the right pane below).
Monetary policymakers, meanwhile, are at something akin to wits’ end with being left on their own to handle things. But, alas, there’s no escape from that barring an honest-to-goodness, coordinated fiscal push.
BMO’s Lyngen, Hill and Jeffery summed things up pretty effectively on Tuesday. Consider this:
The lesson taken away from the equity correction of late-2018 was that, like it or not, the Fed has become the de facto central bank to the world. 1) nCov curtails consumption in many parts of Asia, 2) the large multinationals revise lower revenue/profit estimates, 3) stocks respond accordingly, 4) equity volatility spikes thereby significantly tightening financial conditions, and 5) monetary policy is compelled to react. There are a variety of factors which could prevent this scenario from unfolding; the primary of which being a pivot in the coronavirus outbreak. Suffice it to say, if this were a known knowable 10-year yields wouldn’t be at 1.53%.
It would be difficult to put it any more succinctly than that.
China on Wednesday said there were 1,749 additional coronavirus cases by the end of February 18. That brings the total to 74,185.
Although the new cases are falling, the death toll jumped 136 to 2,004.
One more reason to be long US Treasurys, I suppose.