Investors in U.S. Treasuries contemplate yields tumbling to zero


By Colby Smith
Financial Times, London
Wednesday, March 4, 2020

In the wake of the first emergency interest-rate cut from the US Federal Reserve since the global financial crisis, investors have begun to grapple with a question that was once not even in the back of their minds: could U.S. Treasury yields fall to zero?

On Tuesday the central bank slashed its main policy rate by half a percentage point, bringing it down to a range between 1 and 1.25 percent. The move came in response to the fast-spreading coronavirus, and prompted speculation that the Bank of England and the European Central Bank would soon follow suit with easing measures.

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Still, market reaction to the Fed's cut was swift and at times unforgiving, suggesting investors thought more radical actions would be needed. U.S. stocks fell dramatically and the benchmark 10-year Treasury yield dipped below 1 percent for the first time. That sharp fall in the 10-year yield -- which at the end of last year sat at 1.92 percent -- has raised the prospect that rates could soon close in on zero, joining Japan and the euro area in the deep freeze.

"Everything is on the table," said Jim Caron, senior portfolio manager for global fixed income at Morgan Stanley Investment Management.

Bets have piled higher for additional cuts in rates not only at the Fed's scheduled meeting in two weeks but once again in April. Two quarter-point reductions would bring the Fed's policy rate to a range between 0.5 and 0.75 percent.

Joyce Chang, chair of global research at JPMorgan, said her team sees a 50 percent chance of policy rates in the U.S. dropping to zero this year. Philip Marey, senior U.S. strategist at Rabobank, anticipates the Fed will hit zero as early as June, while Michelle Girard, co-head of global economics at NatWest Markets, said she could see that happening as early as next month. ...

According to Kathy Jones, chief fixed-income strategist at Charles Schwab, the "not unreasonable" expectation that policy rates go to zero suggests two-year yields or five-year yields could turn negative, while the 10-year note could see its yield drop another 0.5 percentage points. ...

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