30-Year Yield Falls to Record Low As Yield Curve Inverts on The 2-10

Another wave of buying in the U.S. government-bond market pushed the yield on the 30-year Treasury note to a record low on Wednesday, the most recent indication of heightening economic stress as investors respond to continuing trade tensions and evidence of slowing growth around the world.

The U.S. 30-year bond yield fell to a record low early Wednesday, hitting the 2.015% level for the first time ever, smashing through its prior record of 2.08%. Yields across Europe also dropped, and the German 10-year bond touched a new low of negative 0.65%.

The long end of the curve, or the 10-year and 30-year yields, are reflecting fears about the global economy, so therefore rates have been declining. But the shorter end, the 2-year has not been declining as quickly, since it reflects the Fed funds rate, which is still above 2%.

While elevated trade tensions with China, and generalized global uncertainty has been a factor for investors for some time now, JJ Kinahan, TD Ameritrade chief strategist, said clients of his firm have been selling stocks and buying bonds more hawkishly for the past two months.

“People are talking about bonds and bond yields like they were talking about Beyond Meat a month ago. You’re talking about bonds trading like high-flying stocks, ” he said.

The 30 year bond is usually associated with the housing market. The 10-year Treasury yield affects 15-year mortgages, while the 30-year yield impacts 30-year mortgages. Higher interest rates make housing less affordable and depress the housing market, and lower rates can have the opposite effect.

“When you have a big decline in interest rates, Treasurys is the place to be. The question is what do you do going forward. Obviously, there’s reason why we’re seeing lower rates, and that is increased recession risks. That comes from trade tensions between the U.S. and China, mixed with some political risks. Hong Kong gets mixed in as well,” he said.

The question for most investors is where to allocate assets once stocks and Treasurys start under-performing.

“In bonds, high yield looks less attractive. You’ve seen high yield under-performing investment grade, and that’s totally expected. If you look at investment grade, when yields stabilize, it’s going to be very very difficult to find yield,” he said. “In that environment, investment grade corporate bonds is the best asset class,” said Hans Mikkelsen, Bank of America Merrill Lynch credit strategist.

The iShares National Muni Bond ETF (NYSEArca: MUB) is up nearly 6% year-to-date and some market observers believe municipal bonds can continue delivering upside in the second half of 2019, especially given that Treasury yields may start to flag.

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