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Global Bond Rout Gains Steam Led by Treasuries in Flight to Cash

Thursday 19th March 2020

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Global sovereign debt suffered another day of sharp losses, driving benchmark 10-year Treasury yields up almost a percentage point from last week’s record low, amid a mad rush to sell even the highest-quality assets.

As U.S. equities plunged again Wednesday, traders cited a widespread move to sell a variety of holdings to generate cash on growing concern about the economic fallout from the coronavirus pandemic. European government debt slumped as well, although Italian 10-year yields staged a wild turnaround, paring losses as the European Central Bank was said to be intervening in the nation’s bond market. There was also news that euro-area officials are considering activating the region’s debt-crisis-era bailout facility, establishing credit lines for governments. The ECB’s governing council is holding an emergency call on its response.

The sell-off was triggered in part as markets braced for trillions of dollars of government spending. But the moves were exacerbated by the dearth of liquidity that’s characterized dealing this month and that has some analysts making comparisons to the financial crisis. Treasuries were vulnerable after fears of the virus’s economic hit sent investors piling in, lifting their exposure to interest-rate risk to record levels.

“There are some rational forces driving Treasuries lower, with all the stimulus coming set to cause more supply,” said Andy Brenner, head of institutional fixed income at National Alliance. “But you also have people selling things where they have profits, or wherever they can, just to raise cash. There is just no liquidity.”

Wednesday’s swings followed a turbulent Tuesday, when rates on 30-year bonds shot up in their biggest one-day increase since 1982. Ten-year U.S. notes yield about 1.23%, up from a historic low of 0.31% set last week, while the long bond yielded 1.84%. German 10-year yields, at -0.24%, remained near their 2020 highs, and are up from as low as -0.91% on March 9.

Trillions of dollars in fiscal support has been pledged or is under consideration as governments around the world rush to contain the coronavirus and shore up financial markets and businesses. Plans by Germany and France to guarantee hundreds of billions in bank loans boosted the global tally.

The advance in yields has pushed the global pile of negative-yielding debt down to $10.4 trillion, a slide of nearly $4 trillion just since the start of the month. At its peak last year there was a record $17 trillion of debt with yields below zero.

The volatility in yields Wednesday came as U.S. stocks sank to a three-year low and as the dollar surged in a day of staggering currency moves. The S&P 500 index was down more than 8%.

“We are in an environment where across the board cash is critical at this point,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities in New York. “You are seeing liquidation all over the place, including in Treasuries. Cash is king here.”


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