Investors’ flight to safety into U.S. Treasuries has driven yields toward historic lows and has market participants pricing in a recession.
“Research on the impact of uncertainty on the economy underscores the dangers of extended market turmoil. We now see a 40% chance of recession within the next 12 months,” wrote Bank of America Merrill Lynch economists Ethan Harris and Neil Dutta in a macro viewpoint published Friday.
The BofA Merrill economists added that “perma-bear economists” tend to see recession around every corner, even though history shows that “the steady deleveraging we are seeing in the U.S. is associated with slow recoveries, not double dips.” The larger concern, they say, is “uncertainty shock” driven by policy makers in Washington and Europe.
Also pointing to recession was LPL Financial Market Strategist Anthony Valeri in a weekly bond market commentary published last Tuesday. The Treasury market’s pessimistic message is clear, he said, noting that droves of investors are continuing to put their money into U.S. debt despite its Aug. 5 downgrade to Double-A+ from Triple-A by Standard & Poor’s.
“Treasuries moved to price in a recession following a volatile week in financial markets that led to strong safe-haven related gains,” Valeri wrote. “The downgrade of Treasuries to Double-A+ proved to be inconsequential to bond investors as Treasury prices surged and yields fell by 0.1% to 0.3% across the maturity spectrum. The 10-year Treasury yield fell to within a few basis points of the 2.06% low achieved during the fall of 2008.”
At this rate, Valeri added, the price on the 10-year Treasury has increased at a rate that would put the yield at zero by mid-October. “Such a pace is unsustainable and we believe the Treasury market may have overshot,” he said.
Taking a historical perspective, Asset Dedication President Brent Burns (left) said that with yields on the 10-year Treasury bond having dropped below 2.1% late last week rates are approaching the record low of 1.95% reached back in January 1941. Asset Dedication is a Mill Valley, Calif.-based portfolio engineering firm and an affiliate of BondDesk.