A fresh burst of demand for US government bonds pushed yields on 10- and 30-year debt down this week to the lowest level since states began loosening lockdown restrictions, as a rise in deaths linked to the pandemic raised concerns over reopening the economy too soon.
The yield on the 10-year Treasury slid as low as 0.56 per cent on Friday before rebounding, while the yield on the five-year note hit a record low of 0.26 per cent.
The potential for fresh lockdowns has increased demand for the safety of Treasuries and amplified the disconnect between nervous bond markets and equity markets that have held on to their gains since a nadir in March and continue to trade near highs for the year.
“We don't agree with what the bond market is telling us, but we respect it,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
The US government secured record-low interest rates on three- and 10-year debt at auctions this week even as its borrowing needs swelled. A $19bn 30-year bond auction was also met with elevated interest from investors.
The strong demand for haven assets emerged after several US states reported further increases in coronavirus cases, after Florida on Thursday recorded its largest death toll since the crisis spread to the US.
Some succour was provided to nervous investors on Friday after Gilead released data showing its potential coronavirus treatment remdesivir had reduced mortality rates in early trials. That provided a bump to stocks and tempered the gains in Treasuries.
Some economists believe that even if the US death rate does accelerate, markets should be able to absorb the shock.
“When you are seeing 10,000 cases in Texas, they are not comparable to 10,000 cases in New York in March or April,” said Chetan Ahya, Morgan Stanley’s chief global economist. “We have a better ability to manage the disease than we had at that point in time and the economic impact of this round of new cases is lesser than what we had seen in the very first round.”
The S&P 500 is up 45 per cent from its March low, including a further 1 per cent gain on Friday. The tech-heavy Nasdaq Composite has soared to new heights, led by companies that have been boosted by the reliance on technology since the outbreak of the virus; on Friday it was up 0.7 per cent from the previous close.
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“We have certainly seen a disconnect between equity markets and the real economy,” said Kim Tilley, a portfolio manager at Lazard Asset Management, adding that “too much optimism” was currently being priced into markets. “One side needs to give for things to be more logical.”
Three US sunbelt states — California, Texas and Florida — recorded on Thursday their largest single-day increases in coronavirus-related deaths since the start of the pandemic. US president Donald Trump, who had planned for a rally in New Hampshire at the weekend, postponed the event, citing the bad weather.
Additional reporting by Harry Dempsey, Daniel Shane, Anjli Raval, Bryce Elder and Tommy Stubbington
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