Date: May 29, 2019
Treasuries Eye 2% as Trade Tension Spurs Increased Fed Cut Bets
Treasuries are in the vanguard of a bull run in global bonds, bringing into sight the prospect of benchmark 10-year yields dropping to 2% for the first time since late 2016 as traders ramp up bets on monetary-policy easing by the U.S. central bank. Escalating U.S.-China trade tensions and faltering global growth have seen U.S. 10-year yields tumble almost 40 basis points since mid-April to as low as 2.22% on Wednesday, while fed funds futures showed about three quarter-point central bank cuts priced in by the end of next year. Yields on 10-year securities in Australia and New Zealand both dropped to records, while those in Japan matched a three-year low of minus 0.1%. Equivalent German bund rates dipped as low as negative 0.17 percent, within a few basis points of their 2016 low. “The overarching theme of slower global growth, inflation not hitting the mark of central bank targets, and the uncertainty of a protracted trade war are all contributing to that rally,” said Tano Pelosi, portfolio manager in Sydney at Antares Capital, which oversees the equivalent of $22 billion. “I can see U.S. 10-year yields heading toward 2% if the pressure from the trade war continues.”
Euro-Area Confidence Improves for First Time in Almost a Year
Euro-area economic confidence unexpectedly improved in May, snapping an almost yearlong streak of declines when the region was battling through a host of struggles. The improvement was driven by industry and the strongest increase in production expectations in more than six years. That was despite continued negativity about export orders and the business climate. A separate report added to the upbeat news, with lending to households and companies picking up in April. The figures will give hope to those predicting a pickup in momentum in the second half of the year. The confidence report from the European Commission showed stronger figures in Germany, France and Italy, the euro area’s three largest economies. Loans to euro-region households climbed 3.4% from a year earlier, the fastest pace since January 2009. Still, in addition to international trade tensions that are weighing on sentiment and crimping corporate earnings, European businesses are grappling with slower global momentum and localized challenges like the structural change in the German car industry
Malaysia Weighs Return to European Bond Markets
Malaysia is considering proposals from banks for a possible return to European bond markets after a hiatus of well over a decade. The country has received offers from quite a lot of lenders proposing to help it raise funds in euros or Swiss francs, according to Muhammed Abdul Khalid, the economic adviser to Prime Minister Mahathir Mohamad. The last time Malaysia sold euro-denominated debt was in 2005, while its most recent Swiss franc offer was in 1998, according to data compiled by Bloomberg. “There are proposals, we are looking at what’s best for the country,” Muhammed said in a Wednesday interview in Singapore. “Importantly, is it better for the economy? Is it cheaper?” The Southeast Asian nation made its return to the Japanese debt market in March with a 200 billion yen ($1.83 billion) offering, its first Samurai bonds since 1999. If Malaysia goes through with a euro-denominated debt sale, it would follow in the footsteps of neighboring Indonesia, the only Asian nation to sell such debt last year, and Philippines, which priced euro notes in May for the first time since in 13 years. Borrowing costs would be a main consideration, the economic adviser added. The total cost of Malaysia’s recent yen bond issuance was 0.63%, helped by a guarantee by Japan Bank of International Cooperation. The Philippines locked in a rate of 70 basis points above mid-swaps for its 750 million euro ($837 million) offering, which narrowed as much as 30 basis points from the initial price target range. Malaysia’s credit rating is two ranks higher than the Philippines at Moody’s Investors Service and Fitch Ratings, and one step higher at Standard and Poor’s.