Investors have been treating themselves to a healthy diet of bonds given the latest volatility as the U.S.-China trade war reaches new heights. This risk-off sentiment is fueling a nosedive in safe haven Treasury yields, particularly in the benchmark 10- and 30-year notes.
The 10-year Treasury note fell to a low of under 1.6%, which represents its the lowest since fall of 2016. Additionally, the yield on the 30-year note is close to the flat 2% marker and near its all-time low exhibited in 2016.
The 10-year Treasury note is 40 basis points below its level last month and is down over 35 basis points in August alone following an interest rate cut by the Federal Reserve of 25 basis points. Meanwhile, as investors are snatching up bonds, prices continue to climb—thus, sending yields even lower.
“The flattening in 2s/10s should be expected in a world of rising global macro risk, coupled with falling forward inflation expectations,” Jon Hill, rates strategist at BMO Capital Markets, said in an email to CNBC. “There is an element of fear here that the Fed won’t cut as much as necessary to keep the cycle going and maintain inflation near 2%. This keeps front-end rates elevated while long-tenor yields fall.”
“However, we think eventually this gives way to a more aggressive Fed cutting campaign – even a ‘mid-cycle’ move could easily be in the 100 bp to 125 bp magnitude,” Hill added.
The trend isn’t isolated to just the United States. Around the globe, yields are also reaching fresh lows, including Germany, the United Kingdom and New Zealand.
“Overnight many central banks cut rates, including New Zealand and this is dragging all yields lower,” Jim Caron, managing director of global fixed income at Morgan Stanley Investment Management, told CNBC. “The Fed is lagging this cycle, so it is no surprise” to see the yield curve continue to invert.
Investors who are hungry for yield can look to riskier debt options, such as high yield exchange-traded funds (ETFs). Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
For more trends in fixed income, visit the Fixed Income Channel.