JP Morgan Analysts: Economic Growth Won’t Send Yields Higher

The capital markets are riding high on optimism with a U.S.-China trade deal injecting life into stocks with the S&P 500 and Dow Jones Industrial Average reaching new highs. However, benchmark Treasury yields are still hovering under 2% except the 30-year yield and according to global investment firm JP Morgan, even more economic growth won’t help send yields higher.

“Better growth alone is unlikely to resolve the investor headache of too many low/negative-yielding fixed-income assets. Material … rises in yields require stronger growth, central bank tightening and the unwind of QE. Only the first seems plausible next year,” wrote John Normand, head of cross-asset fundamental strategy at JP Morgan.

Per a MarketWatch report, yields will stay low “unless central banks make an abrupt turn to tighter monetary policy from the rate cuts and quantitative easing policies they embarked on this year, even a recovery in economic growth is unlikely to sink prices and buoy long-term yields across major government bond markets. Yields and bond prices move in opposite directions.”

One way to obtain more yield is to take on more risk via duration. As such, Treasury Department has been contemplating the release of an ultra-long bond, but it appears debt issues with a 50-year maturity date may be coming sooner than we think. The news comes as yields have been at record lows and talks of zero to negative interest rates are creeping into bond market vernacular.

The news comes after the Federal Reserve lowered interest rates for a third time. The central bank doesn’t foresee any future hikes until economic data warrants the move.

Per a CNBC report, the Treasury “is ‘exploring’ potential additions to the current suite of Treasury securities, including a 20-year nominal coupon bond, a 50-year nominal coupon bond and a one-year floating-rate note linked to the Secured Overnight Financing Rate, according to the Treasury’s quarterly refunding statement released Wednesday.”

“Treasury is taking a proactive approach to prepare for prospective future financing needs,” said the statement on Wedensday.

The department was already contemplating the idea last month per a report in Barron’s, “U.S. officials have revived a conversation about issuing ultra-long Treasury bonds, which would mature in 50 to 100 years, now that long-term borrowing costs have fallen to record lows. Treasury Secretary Steven Mnuchin recently told Bloomberg News that his staff is ‘actively revisiting’ the idea of issuing an ultra-long bond, ‘and it is something that is under very serious consideration.’”

For more market trends, visit  ETF Trends.