This chart shows slower global growth is dragging down the 10-year Treasury yield
A creeping economic slowdown that has taken hold of Asia and Europe, is starting to command the attention of investors in U.S. government debt.
In the past few months, the 10-year Treasury yield’sTMUBMUSD10Y, -0.50% trajectory has followed the deterioration of data across the world’s leading economies, reversing the story for most of 2018 when U.S. investors shrugged off softer growth in the eurozone and China. Since November, the 10-year yield has fallen around 60 basis points to trade at 2.670%. Bond prices climb as yields fall.
The chart above shows that after Citi’s developed market economic surprises index started to tumble around September, the 10-year yield struggled to hold on to its year’s highs at around 3.20%, steadily falling in the past two months in line with the index’s decline. The index tracks how data across the world’s major economies such as Japan and Germany performed relative to analysts’ expectations, with a negative reading pointing to slower economic momentum.
Before November, the bond market had ignored the tide of weaker-than-expected data in developed markets as the U.S.’s robust economic momentum decoupled with the rest of the world, keeping the Federal Reserve on track to raise interest rates. The 10-year rate surged toward 3.00% in the first half of 2018 even as the Citi’s surprise index fell from a seven-year high of 50 to sub-zero levels.
Yet with the Fed’s willingness to raise rates in 2019 coming into question in the past few months, cooling global growth is back on the agenda of bond investors who would have given it short shrift when Treasury yields were near multiyear peaks and the S&P 500SPX, +0.26% stood at all-time highs in October.
Throughout last year, Fed Chairman Jerome Powell highlighted global economic headwinds as a risk to the central bank’s policy outlook. But calls for the central bank to slow down its hiking path started to gain fresh impetus after financial conditions shrunk on the back of tighter credit spreads and lower stock prices.
“Powell will struggle to continue hiking rates given the response of risk-assets and the realities of a slowing global economy,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
The sensitivity of the Treasurys market to global economic data asserted itself on Wednesday when a raft of soft numbers from purchasing managers’ index in Europe and China triggered a stock market selloff in Asia, sending prices for safe havens like U.S. government paper higher.
See: Data showing Chinese manufacturing cooling put Asia stock markets in early hole for 2019
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