For the third day in succession, U.S. Treasury yields dropped with the 10-year yield recording its largest weekly decline in 5 months. This came as the 10-year yield closed near to its four month low as treasury yields were pushed downward on fears of a global economic slowdown.
The lower the treasury yield, the higher the demand is for low risk U.S. treasury bonds as investors look for safe havens while stock and commodity markets fall in the face of several negative indicators.
This has been prompted by a continuing fall in oil prices on the back of increasing supplies amid concerns about declining demand, particularly from China, where there are increasing signs of an economy in slowdown, despite government stimulus efforts.
The latest forecast for Chinese factory activity fell to a six and a half year low in August, shortly after the surprise devaluation of the yuan by the Chinese central bank, the People's Bank of China.
The importance of the Chinese economy is reflected in the fact that while China accounts for 15% of global output, the country has contributed almost 50% of global growth in the last few years, according to the Wall Street Journal.
The latest news from Reuters is that stocks in China slumped by more than 8% in trading on Monday (Chinese time). This means that the Shanghai index has now given up all its gains for the year after it fell by 11% last week.
Eswar Prasad, a Cornell University Professor and former head of the Chinese desk at the IMF commented, “Views about China’s economic prospects appear to be shifting from serious concern to near panic.”
Stocks on Wall Street suffered their worst selloff on Thursday as markets were beset with concerns about the slowdown in the global economy. The S&P 500 index (SPX, -3.19%) lost 2.1%, falling below its key 200 day moving average. The index is now around 1% lower than it was at the start of the year. This rout continued on Friday as the Dow Jones Industrial Average (DJIA, -3.12%) recorded its biggest two day fall since the 2008 financial crisis.
The Treasury price is inversely proportionate to the yield, where the fixed interest on Treasury bonds offers a smaller return as the cost of the bond increases, with investors abandoning other markets in favor of the more secure bonds.
Meanwhile, the ten-year Treasury (TMUBMUSD10Y, -2.775%) fell 3.1 % on Friday to 2.052%, its lowest level since 30 April, according to Tradeweb. The yield has lost 14.4% this week which is a sizeable number for Treasurys and is the largest weekly fall since 20 March.
Similarly, the yield on the 30-year bond (TMUBMUSD 30Y, -1.55%) lost 0.9% to 2.743%, its lowest level since 29 April. Following suit moving downwards, the two-year Treasury note (TMUBMUSD, -5.91%) lost 4.7% to close at 0.621% on Friday, its lowest level since 15 July and with a loss of 10% for the week.
Putri Pascualy, credit strategist and portfolio manager at PAAMCO said, “Expect yields to remain low, with the 10-year yield breaking below 2% as the continuing strength of the dollar will make dollar denominated fixed income assets more attractive.”