Bloomberg News: Calls Persist for Negative U.S. Yields Even as Fed Signals Pause

November 04, 2019

Article by Vivien Lou Chen in Bloomberg News

The Federal Reserve may be hinting at a pause in its policy easing, but Bruno Braizinha at Bank of America Corp. sees a risk that yields on some Treasuries will go negative by 2021 as the U.S. central bank cuts rates all the way to zero.

While that may seem like a remote scenario to some, the strategist says the market can’t ignore the possibility that 5- and 7-year yields -- both presently within a few basis points of 1.60% -- could fall below zero. He says now’s the time to hedge against that prospect.

Braizinha wrote about the risk of sub-1% yields in the U.S. just ahead of August’s historic Treasuries rally, which drove 10-year yields as low as 1.43% on Sept. 3. That rate has since rebounded to around 1.71%, but his central view is that the benchmark yield will go even lower -- to around 1.25% -- in the next three months. In addition to that, he also sees the Fed being forced to return to near-zero rates amid a deterioration in the American economy and an eventual realization by investors that a U.S.-China trade deal won’t be a panacea.

“It’s important to acknowledge those risks and not overlook these scenarios,” he said by phone. “All the positive sentiment on trade is fading, and what’s changed now is that it’s more likely that at some point the Fed is going to have to cut again.”

A day after the Fed signaled a pause on Oct. 30, yields plummeted across the curve. In Braizinha’s view, the moves reflected a bias that permeated the bond market based on expectations for worsening economic data, lower yields and a flatter curve.

The Bank of America analyst, who recommends betting on 30-year Treasuries in anticipation that yields will go much lower, is not alone in contemplating negative Treasury yields.

Ryan Sweet, head of monetary policy research at Moody’s Analytics, said he also sees a risk that Treasury yields could go below zero if the U.S. falls into recession. And, according to him, this could happen even if the Fed doesn’t cut its target below zero.

To read this article in Bloomberg News in its entirety, click here.

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