At its June 19th meeting, the Federal Open Market Committee (FOMC) checked almost every box on the wish list of dovishness...short of actually cutting rates, that is. FOMC participants took the following near-easing actions:
Bond traders reacted enthusiastically to the statement and Chairman Powell's market-friendly tone which drove interest rates down further. But there is another important factor to the sustained rally in U.S. Treasury bonds and the inverted yield curve: negative-yielding global debt.
As of mid-day Wednesday, countries with negative ten-year sovereign yields included Japan, Germany, Denmark, Switzerland, the Netherlands and Sweden. France occasionally joins the club but sported a lucrative 0.016% yield when I last looked. Data from the Barclays Global Aggregate Negative Yielding Debt Index suggest there is over $13 trillion in negative-yielding debt around the world.
In fact, virtually every major economy has a lower benchmark sovereign yield than the U.S.' 2.045%. At least ten-year government yields of Greece and Italy maintain a healthy spread over U.S. Treasuries of...uh...38 and 9 bps!?! Really? Score one for Mario Draghi. Anyway, it's no surprise there is intense demand for U.S. Treasuries given the alternatives investors face in other countries.
Understanding the policy efficacy of negative rates is difficult. I understand the logic: encourage savers to invest in riskier but, hopefully, more productive endeavors or face a slow erosion of buying power. To me the whole concept reeks of economic dysfunction, which is hardly an incentive to invest for the future. Holders of $13 trillion of negative yielding debt would seem to agree, preferring to use sovereigns and other higher-quality debt as a store of value until better opportunities arise - if they ever do. Mr. Trump and the markets want lower policy rates and the FOMC seems ready to oblige. I guess the hope is lower rates will paper over erratic trade policy and a lack of mettle to move out of crisis-era thinking.
Federal Reserve Press Release and Economic Projection Materials, June 19, 2019
Federal Reserve Press Release and Economic Projection Materials, March 20, 2019