Global growth worries are overshadowing a report on the possibility of a faster-than expected timeline in which the Federal Reserve could end its bond purchases by mid-2022, driving Treasury yields lower on momentum that may not reverse much anytime soon.
A round of weaker-than-expected data out of China and the Taliban’s seizure of power in Afghanistan helped sour investor appetite for riskier assets on Monday, pushing all three major stock indexes
slightly lower, though the S&P 500 and Dow Jones Industrial Average remain not far off all-time highs. Lurking in the backdrop is worsening, pandemic-driven congestion at China’s biggest cargo ports, which is raising fears that the world will soon face a slowdown.
The multitude of negative factors piling up is upending earlier fears about how the bond market might react to any hint of a Fed pullback — with long-end yields spiking, similar to the 2013 taper tantrum episode. Instead, investors have barely responded to the Fed’s signals recently, and the possibility of a 2% 10-year Treasury yield
— generally associated with a healthy U.S. economy — seems less and less likely with each passing day this year.
“Even though we might get a faster tapering process that would ordinarily lift bond yields, other factors could dominate,” said Derek Tang, an economist at Monetary Policy Analytics in Washington, who sees the 10-year rate getting to 1.5% to 1.75% by year-end. Crumbling global supply chains “could lead to lower growth projections for the U.S. and world-wide, and diminished risk appetite would lead to a flight to Treasurys — offsetting any upward pressure from tapering.”
The yield on the 10-year Treasury note
was at 1.256%, down around 5 basis points from its level Friday afternoon. Yields and debt prices move in opposite directions.
Continued falling U.S. yields would push real rates — or those adjusted for inflation — even further below zero, an ominous sign for the economy and one that threatens investors’ returns across asset classes, Tang said in a phone interview Monday.
An environment of falling yields as the Fed gets ready to pull back on its $120 billion in monthly bond purchases is one that not many people had envisioned. To start, the central bank tied its tapering timeline to sufficient economic progress and regards tapering as a prerequisite for raising interest rates. And rate increases have long been predicated on the notion of an economy that’s improving, not faltering.
But now that global growth fears are rising, tapering is being viewed by some in the market as tightening conditions too early, according to Thomas Graff, a portfolio manager at Brown Advisory, which oversaw about $128 billion in client assets as of June.
On Monday, The Wall Street Journal reported that policy makers were getting closer to an agreement to begin paring purchases as soon as November, with a case building for an announcement at the Federal Open Market Committee’s Sept. 21-22 meeting. Some are pushing to end asset purchases by mid-2022, the report said — a timeline that would give Fed officials the flexibility to hike sooner than expected if needed.
“What we’re seeing in the rally today and the past few weeks is that, in the face of ever increasing evidence that tapering is coming, the growth fear is outweighing that,” Graff said, via phone. “There’s definitely a sense in the market that maybe we’re past peak growth.”