U.S., European Yields Drop on Record Economic Downturns -- Update

Government bond yields dropped in the U.S. and Europe after fresh data on Thursday showed the worst quarterly economic contractions on record for the U.S. and Germany in the second quarter.

Advance gross domestic product estimates for the U.S. showed the economy shrank by 32.9% versus the previous quarter, although that was better than the 34.7% contraction that had been forecast. On Wednesday, the Federal Reserve highlighted the long-term problems the economy faces when it kept interest rates unchanged. Investors noted that economic momentum has slowed recently as the U.S. struggles to control the coronavirus pandemic.

But European yields fell faster than those on Treasurys after data showing the German economy shrank 10.1% in the second quarter. The quarterly contraction was the largest since official records began in 1970 and likely the biggest since World War II, according to Joerg Zeuner, chief economist at Union Investment.

Ten-year Treasury yields fell as low as 0.540%, from Wednesday's close of 0.571%, according to Tradeweb. They rose later to 0.546%, on course for their lowest ever close except for one extremely volatile day in early March when yields closed at almost exactly 0.5%.

In Europe, German 10-year yields were at minus 0.547%, down sharply from minus 0.500% on Wednesday, while Italian and U.K. 10-year yields also slipped by more than the Treasury equivalents.

The greater drop for European yields contrasted with investor and analyst views on the relative outlooks for Europe and the U.S. Analysts at Goldman Sachs expect European growth to outperform the U.S. this year because of the region's better control of the virus, stronger recent economic data and a more favorable set of monetary and fiscal policies.

The sharp U.S. second-quarter decline in GDP masked some better economic data during June, such as improving employment trends. However, there had already been evidence of a loss in that momentum in the economy from high- frequency data on transport use and short-term restaurant bookings, according to David Riley, chief investment strategist at BlueBay Asset Management. More social distancing, concerns about job security and higher savings rates would all hurt economic activity and depress U.S. yields, he said.

"There is evidence to suggest that the rebound in the U.S. has been hindered by an inability to contain the virus," Mr. Riley said. "Europe has been containing the virus better and U.S. growth exceptionalism is no longer looking so reliable."

But there is a tension between the weak outlook and the weight of issuance of fresh Treasury bills in the U.S. that is limiting the decline in yields at shorter maturities, according to Alison Nathan, senior macro strategist at Goldman Sachs.

Fed Chairman Jerome Powell called for greater government spending to support the economy, which will entail a need for more Treasury issuance. Goldman expects net issuance of $4.8 trillion in 2020 -- meaning that total debt outstanding will grow by that amount -- and $3 trillion of that will come in short-term bills.

"Based on our expectation for increased bill issuance, we no longer anticipate material downward pressure on front- end yields," Ms. Nathan wrote in a note.

Two-year Treasury yields slid marginally to a record 0.123% Thursday, from Wednesday's previous all-time low of 0.129%.

Write to Paul J. Davies at paul.davies@wsj.com

By Paul J. Davies

Government bond yields dropped in the U.S. and Europe after fresh data on Thursday showed the worst quarterly economic contractions on record for the U.S. and Germany in the second quarter.

Advance gross domestic product estimates for the U.S. showed the economy shrank by 32.9% versus the previous quarter, although that was better than the 34.7% contraction that had been forecast. On Wednesday, the Federal Reserve highlighted the long-term problems the economy faces when it kept interest rates unchanged. Investors noted that economic momentum has slowed recently as the U.S. struggles to control the coronavirus pandemic.

Data also showed the German economy shrank 10.1% in the second quarter. The quarterly contraction was the largest since official records began in 1970 and likely the biggest since World War II, according to Joerg Zeuner, chief economist at Union Investment.

The yield on the 10-year U.S. Treasury note settled at 0.540%, compared with 0.578% Wednesday. It was the lowest close except for one extremely volatile day in early March when the yield settled at 0.501%.

In Europe, German 10-year yields dropped to minus 0.544% from minus 0.500% on Wednesday, while yields also slid on government bonds from the U.K. to Italy. Yields fall when bond prices rise.

Analysts at Goldman Sachs expect European growth to outperform the U.S. this year because of the region's better control of the virus, stronger recent economic data and a more favorable set of monetary and fiscal policies.

The sharp U.S. second-quarter decline in GDP masked some better economic data during June, such as improving employment trends. However, there had already been evidence of a loss in that momentum in the economy from high- frequency data on transport use and short-term restaurant bookings, according to David Riley, chief investment strategist at BlueBay Asset Management. More social distancing, concerns about job security and higher savings rates would all hurt economic activity and depress U.S. yields, he said.

"There is evidence to suggest that the rebound in the U.S. has been hindered by an inability to contain the virus," Mr. Riley said. "Europe has been containing the virus better and U.S. growth exceptionalism is no longer looking so reliable."

But there is a tension between the weak outlook and the weight of issuance of fresh Treasury bills in the U.S. that is limiting the decline in yields at shorter maturities, according to Alison Nathan, senior macro strategist at Goldman Sachs.

Fed Chairman Jerome Powell called for greater government spending to support the economy, which will entail a need for more Treasury issuance. Goldman expects net issuance of $4.8 trillion in 2020 -- meaning that total debt outstanding will grow by that amount -- and $3 trillion of that will come in short-term bills.

"Based on our expectation for increased bill issuance, we no longer anticipate material downward pressure on front- end yields," Ms. Nathan wrote in a note.

Write to Paul J. Davies at paul.davies@wsj.com


  (END) Dow Jones Newswires
  07-30-20 1134ET
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