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Money managers overseeing trillions of dollars are putting money into US government debt like never before, in a wave that is gaining strength as the spreading coronavirus casts doubt on the global growth outlook.
Evidence of the demand can be found across the fixed-income universe.
Pensions, which have been ramping up bond allocations for more than 10 yrs after a change in regulations, now hold a record amount of longer-dated Treasuries.
Bond mutual funds saw a historic inflow of money last year, with no sign of a slowdown. Even hedge funds have joined in.
The wall of cash is a boon to American taxpayers as the federal deficit swells. It’s keeping Treasury yields, a benchmark for global borrowing, near all-time lows. With buyers ready to buy, even surging stocks, record auction sizes and the tightest labor market since the 1960’s can barely make a dent in bond prices.
“Treasuries are a resilience play that makes sense,” said Scott Thiel, chief fixed-income strategist at BlackRock Inc. “And so far, people have been rewarded for coming in and buying when yields get to the high end of the range.”
A few weeks ago, global economic reflation and the seeming inevitability of higher yields were the buzz among strategists and investors.
The virus’s onslaught is unraveling that narrative, which already faced skepticism from those who argue that persistently low inflation and shifting demographics will pull yields lower.
We expect the Treasury 10-year yield to fall to zero, perhaps within 2 years, that is based on my view that developed economies are facing a combination of aging demographics and falling birth rates, slow growth and low inflation.
Investors are buying Treasuries as an insurance policy and have turned the US yield curve on its head. With inflation still subdued and concern mounting that the spreading illness will damage an already fragile global economy, traders have boosted bets on Fed rate cuts in Y 2020. That prospect is in turn supporting equities.
Benchmark 10-year US yields have dropped to nearly 1.6%, from a Y 2020 high of 1.94% in the 1st week of the year. The world’s biggest bond market has earned about 2.2% this year, after a 6.9% return in Y 2019, the best performance since Y 2011.
Fed Chairman Powell last week cited the virus outbreak as a risk. Goldman Sachs Group Inc. predicts it will subtract 2% from annualized global growth this Quarter.
“If the Fed is staying super-accommodative, in reflation mode then you want to buy stocks, credit and Treasuries,” said an analyst at Bank of America Corp.
For the Top 100 funds, with combined assets of more than $1.4-T, the fixed-income allocation surged to about 49% at the end of Y 2018 from 29% in Y 2005, as equities’ share fell by 50% to 31%, according to Milliman Inc., a pension and risk advisory firm. JPMorgan Chase & Co. strategists estimate the debt portion topped 50% as of December.
An up-to-date read on retirement funds’ demand can be seen in the record surge in Strips, which are created when Treasuries are split into principal- and interest-only securities. Pensions tend to favor these assets, which have longer duration, or sensitivity to interest-rate changes, to match the length of their liabilities.
Soaring stocks are also spurring buying of bonds on price declines.
US public pensions, with total assets of over $4-T, have kept holdings steady over the past 5 years, at about 25% in fixed income, 50% in public equities and the rest in alternative investments, according to data from the Pew Charitable Trusts.
As equities have climbed, the funds have needed to buy more debt to keep the breakdown stable, said the director of public sector retirement systems at Pew.
“There is just more money available to invest than there is marketable investment opportunities, and no risk of inflation at this time,” said Shayne Heffernan, PhD, Heffernan Capital Management
Tuesday, the major US stock market indexes finished at: DJIA-165.89 at 29232.10, NAS Comp +1.57 at 9732.77, S&P 500 -9.87 at 3370.29
Volume: Trade on the NYSE came in at 914-M/shares exchanged.
- NAS Comp +8.5% YTD
- S&P 500 +4.3% YTD
- DJIA +2.4% YTD
- Russell 2000 +0.9% YTD
HeffX-LTN’s overall technical analysis for the major US stock market indexes is Bullish to Very Bullish in here
Looking ahead, investors will receive the Producer Price Index for January, Housing Starts and Building Permits for January and the weekly MBA Mortgage Applications Index Wednesday.