U.S. Real Yields Fall to Record Low Amid Growth Concerns



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(Bloomberg) — The real yield on U.S. 10-year debt fell to a record low as concerns mounted over the outlook for economic growth.

The rate, which strips out inflation, fell almost six basis points to minus -1.269%. The move was compounded by a lack of trading liquidity, with the 10-year breakeven rate — a market proxy for the average annual rate of consumer prices over the next decade — edging higher at 2.36%.

Still, it points to souring investor sentiment amid the rapid spread of the delta variant that threatens to derail the economic recovery. And it comes as investors piled into haven assets after a surprise hit to Germany’s business confidence.

“We are in a regime of growth deceleration in the U.S., as the recovery becomes more mature and broad based, at the same time as inflationary pressures build,” said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc.

U.S. stocks started the week on shaky ground, with the swinging between gains and losses as investors assessed the outlook for growth in a week full of corporate earnings.

Market jitters are also building ahead of Wednesday’s Federal Reserve decision, when officials will discuss the outlook for further monetary stimulus. Traders are slashing forecasts for policy tightening into the meeting, even after inflation accelerated at the fastest pace in over a decade last month on an annual basis.

Real yields could touch new lows if the Fed remains committed to keeping monetary policy unchanged, Michael Kushma, chief investment officer for Morgan Stanley (NYSE:) Investment Management, said in an interview on Bloomberg TV.

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“The more they push out their forward guidance of when they’re going to — and how fast they’re going to — raise rates, the more yields can stay low and, if inflation stays high, real yields can continue to remain very low,” he said.

Monday’s move follows a crackdown on the tech sector in China that sent 10-year Treasury yields down almost six basis points to 1.22%, before they traded little changed. Bund yields rebounded after earlier slipping to a five-month low following a gauge by the Munich-based Ifo Institute fell to 100.8 from 101.7 in June. Economists in a Bloomberg survey had expected an improvement.

Rally Overdone?

The German data fueled concerns about the economy’s ability to withstand the delta variant, but already there are concerns the latest advance looks overstated. Antoine Bouvet, senior rates strategist at ING Groep (AS:) NV, said he wouldn’t touch German or U.S. debt “with a bargepole.”

“Carry in Treasuries has dropped and volatility has increased — higher risk and lower return isn’t a winning combination,” he said.

Nevertheless the rally could have further to run. Bond supply is low during the summer months and demand from central banks is high, meaning investors may snap up whatever they can get.

The rally “feels overdone,” said Imogen Bachra, a strategist at NatWest Markets. “But we could be in this new range for a few weeks. Markets will want more evidence around the effectiveness of the vaccine and cases turning in the U.K. and Europe.”

(Updates market moves throughout; comments from Morgan Stanley Investment Management.)

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