The coronavirus crisis has brought another first to US financial markets – negative yields on government debt.
Yields on 1-month and 3-month Treasuries fell below zero on Wednesday, a week and a half after the Federal Reserve cut its benchmark rate to near zero and investors flocked to the safety of fixed income securities in an environment of general market turbulence.
It was the first time this had happened in 4½ years when both bills briefly flashed red and yields fell to minus 0.002% each. Wednesday’s readings were well below those. The one-month was trading at minus-0.053% while the three-month was at minus-0.033% around 2:35 p.m. ET.
“It’s part and parcel of the flight to quality,” said Kim Rupert, managing director of global fixed income at Action Economics. “They are obviously the most liquid instrument. We saw a lot of selling pressure a few days ago as everyone was selling everything to get cash. But with all the plans the Fed has put in place, the voucher market is much safer.”
The United States now joins large swaths of Europe and Japan that also have negative yielding debt.
In Germany, the move was even more widespread, with all government fixed-income instruments except 30-year bonds carrying rates below zero. Denmark, France and Sweden are among other European nations also in the category.
Negative yields are largely a function of demand, as prices and yields move in the opposite direction for bonds. Investors pay a significant premium above par on bonds and may receive less than their original investment at maturity. Deposit rates can also be negative.
Negative rates, however, are not directly related to central bank policy. Fed officials dismissed the idea that the US central bank could eventually cut its key rate below zero.
However, that might not matter if current market trends continue. While longer-duration Treasuries are still far from negative territory, the trend in yields is down.
“There is nothing more to say in this environment. They could spread,” Rupert said. “Everyone expects the Fed to be lower for longer, and I mean longer. The whole bias is that yields are going down. I wouldn’t rule out the front of the curve going negative.”
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