How low can bond yields go?

Posted at 9:05 AM, Jun 25, 2019
and last updated 2019-06-27 11:43:34-04

The market thinks it’s a lock that the Federal Reserve will cut interest rates at its next meeting at the end of July. The cut is expected largely because of concerns that the global economy is slowing in the midst of the US trade war with China and other countries.

In fact, investors are even pricing in a more than 40% chance that Fed chair Jerome Powell will be super aggressive and lower rates by a half a percentage point instead of a typical quarter-point cut, according to Fed funds futures tracked by CME Group.

A “Fed rate cut is warranted and coming,” said Matthew Diczok, CIO fixed income strategist for Bank of America, in a recent interview with The Bond Buyer.

These expectations have helped push the yield on the benchmark 10-year US Treasury bond down to about 2%. So the big question now is: How much lower can they go?

Diczok will be joining CNN Business correspondent Eleni Giokos on CNN Business’ “Markets Now” live show Wednesday to talk about the bond market and the Fed.

Because longer-term Treasury yields have already fallen pretty sharply in the past few months, Diczok thinks investors searching for steady income payments may now be tempted to buy so-called corporate junk bonds instead of longer-term Treasuries.

Junk bonds a better — but riskier — bet than Treasury bonds

These junk bonds tend to pay much higher yields than government bonds, but they are called junk for a reason. There is a bigger risk of default.

“Lower credit quality bonds — high-yield corporates, for example — generally offer higher returns over time,” Diczok told US News and World Report last week. “But they can also exhibit steep losses in any given year and tend to move in the same direction as stocks.”

But Diczok thinks US Treasuries still may be attractive when compared to bonds from other developed nations.

Diczok recently noted that bond yields in Germany are negative, in anappearance on Yahoo Finance. That is largely due to expectations that the European Central Bank is likely to keep rates low to fight deflation and sluggish growth.

“There is certainly an issue in Europe that needs to be addressed. They do need further stimulus,” Diczok said, adding that “[the US] is in a much better place than the rest of the globe.”

After all, as Japan continues to grapple with a weak economy, the yield on its benchmark 10-year bond is negative as well.

Diczok also told Yahoo Finance he believes that the Fed will continue to assert its independence. Powell will do what’s right for the economy — regardless of incessant criticism from President Donald Trump in a series of tweets and interviews, he said.

“Powell is going to continue not to address any of the politics directly. I think he is going to stick to the facts,” Diczok added in the Yahoo interview.

“Markets Now” streams live from the New York Stock Exchange every Wednesday at 12:45 pm ET. Hosted by CNN’s business correspondents, the 15-minute program features incisive commentary from experts.

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