Treasury Yields Rise and Bond Markets Wobble as Governments Eye Trillions in Coronavirus Stimulus

Trillions in planned coronavirus stimulus is colliding with billions in new bond purchases from global central banks, and bond markets are starting to feel the impact.
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U.S. Treasury bond markets extended declines Wednesday, while global government bond yields continued to rise around the world, as trillions in planned stimulus to combat the coronavirus impact spooked investors and raised concerns for ballooning deficits.

President Donald Trump will seek a $1 trillion aid package from Congress this week as part of its effort to cushion the economic blow that is almost certain to hit the U.S. economy in the coming months. Japan is reported to be discussing significant stimulus for its economy, which is also being supported by trillions in liquidity from the Bank of Japan, while Britain unveiled a near $500 billion package of loan guarantees yesterday.

European leaders, as well, as said to be mulling a similar-sized effort to soothe recession concerns in the world's biggest economic bloc.

"Under normal circumstances it's an insane policy which can lead to hyper-inflation," Ian Shepherdson of Pantheon Macroeconomics said of Trump's plan to send $1,000 checks to nearly every American citizen.  

"But context matters. The U.S. now faces a massive deflationary shock, and the scale of the money-printing we think is likely to be necessary is no more than 10% of GDP," he added.

Benchmark 10-year U.S. Treasury bond yields backed up to 1.20% in overnight trading, before paring that move to 1.124%, as investors attempted to price in a $1 trillion addition to the U.S. deficit -- which already sits near the $1 trillion mark -- and the inevitable surge in bond sales that will be needed to fund it.

Bonds were also not finding support from either the Federal Reserve's recent return to to quantitative easing, which will include $500 billion in Treasury purchases and a further $200 billion in mortgage-backed securities, nor the global move to safe-haven assets amid the ongoing rout in stocks.

Global fund managers, in fact, are piling into U.S. Treasuries, BofA's closely-watched survey indicated Tuesday, amid the coronavirus pandemic, a steep decline in oil prices and a surge in corporate debt default risk.

Fund managers controlling more than half a trillion in assets also noted the biggest collapse in equity allocation since the survey began in 1994, BofA said, with investors trimming Eurozone and emerging market allocations, as well as bank stocks, while boosting exposure to utilities and healthcare to the highest levels since the first quarter of 2009.

Cash allocations, as a result, have surged by a record 4% from last month to around 5.1% of total assets, while 'long U.S. Treasuries' rises to become the industry's most crowded trade.

With that in mind, it's difficult to see how Treasury yields can be rising -- and prices falling -- when the Fed is buying $40 billion in bonds each day.

European government bond yields, as well, are rising despite the European Central Bank's revival of its dormant QE program last week with a a "temporary envelope" of €120 billion in new purchases. 

Italy's benchmark 10-year BTP spiked 63 basis points higher Wednesday, taking the extra yield, or spread, that investors demand to hold that paper instead of triple-A rate German bunds to a multi-year high of 3.22%.

European banks, meanwhile, gobbled up $112 billion in so-called "swap lines" from the Federal Reserve, the most since the global financial crisis in 2008.  Swap line are designed to keep dollars flowing in economies outside of the United States.

The U.S. dollar index was marked at a three-year high against a basket of six global currencies at 99.95 in early European trading. 

“Measures designed to aid European banks will not materially improve their fortunes. Loan guarantees may prevent some losses, but will do little to ease the pressure on earnings for this sector, which have been hammered by negative rates," said Benjamin Jones in the multi asset research group at State Street Global Markets. 

"What needs to change, is demand for loans, and the rate charged on those loans, to increase. That is not happening anytime soon," he added.