Global bond markets extended their recent rally Wednesday, pulling benchmark U.S. Treasury yields to fresh multi-year lows, as investors continue to favor fixed income assets amid escalating trade tensions, slowing growth and tepid inflation.
Bank of America Merrill Lynch figures suggest nearly $160 billion has flowed into fixed income assets this year, dwarfing the $135 billion that's moved out of global equity markets, pushing benchmark yields in the world's biggest economies to multi-year lows. In fact, the drive for safe-haven assets, which has been exaggerated by the ramp-up in trade war rhetoric and notable declines in manufacturing and services activity from Tokyo to Toronto, now has nearly $13 trillion in fixed income securities trading with a negative yield.
Benchmark 10-year German bunds, for example, are trading at -0.167%, near their all-time low, as the European Central Bank warns on regional financial stability risks and investors bet on further monetary easing in the final month's of President Mario Draghi's seven-year tenure in Frankfurt.
"Challenges to financial stability increase amid downside risks to the economic outlook," the ECB said Wednesday in its semi-annual Financial Stability Report. "Should downside risks to growth materialise, financing costs for vulnerable sovereigns are likely to increase which may unearth debt sustainability concerns."
In Japan, 10-year JGBs hit a December 2016 low of -0.1% in overnight trading, even after data last week showed its central bank's key inflation gauge -- core consumer prices -- accelerated to a three-year high of 0.9% last week.
With little or no yields to chase in major markets around the world, investors are increasingly directing cash into U.S. Treasury bonds, pushing 10-year yields, which move in the opposite direction of prices, to 2.219%, the lowest since September 2017.
Perhaps more worryingly, the moves have taken the 10-year yield some 10 basis points south of three-month Treasury bills, the deepest "inversion" of the yield curve since 2007. An inverted yield curve, a condition where 3-month or 2-year yields rise above 10-year yields, has signaled nearly every U.S. recession for the past 60 years, according to Fed studies.
Fed Fund futures prices on the CME Group website, meanwhile, are pricing in an 86% chance of a December rate cut, while those linked to a September move are implying a 62% chance, from from just 50% last week.
Investors are also favoring shorter-term bonds, which are less sensitive to interest rate moves, with a $40 billion auction of 2-year notes yesterday drawing the strongest demand in more than nine months. Official Treasury figures also show the foreign investors added $23.9 billion in T-bills in March -- the most recent reporting date -- as part of a near $70 billion uptick in short-term debt.