The Daily Update - Diverging and Record Low Yields

2-year US Treasury yields dropped below 2% today, putting the curve between 2 and 6-year bonds at least 50 basis points below the Fed Funds Target Rate (upper bound). Meanwhile, German 10-year Bund yields hit all-time lows of -0.206%: even lower than the negative yields back in mid-2016 when the US 10-year yielded 1.35%. In comparison current US 10-year yields are hovering just above 2.15% - after a steady fall over May from 2.5% - still 80 basis points above their mid-2016 lows. The global shift to safety coincides with further upsets in global trade as the US threatened Mexico with tariffs on “all goods” after a single group of migrants, numbering over a thousand, crossed the border illegally.

Even yields across three of the PIGS in Europe have fallen substantially with just Italy above its 5-year average at 2.72% (vs 2.07%) with Portugal (0.79% vs 2.58%), Greece (2.95% vs 6.65%) and Spain (0.72% vs 1.58%) all less than a half of their 5-year averages. These moves in yields correlate with the European Election results with only Italy showing strong support for populist parties. Although a number of these heavily indebted Eurozone members have worked wonders with their economy, even surpassing tough targets from the IMF, they all still hold substantial net foreign debts that could quickly turn unserviceable if their yields jumped in a more acute risk-off environment making them unable to roll still-sizable short term debts.

Another interesting example we’ve noticed in 2019 of shifting sentiment and yields is Tesla. As its share price nearly halved through the course of this year, its 5.3% 2025 bond now offers nearly 9.5%. We prefer to avoid negative yields, net foreign debtors with either unattractive yields or unserviceable ones, and higher yields on speculative bets that then almost double in 5 months. Instead bonds like A3 rated TAQA 2036s have seen their yields fall from 4.8% to 4.25% so far this year, rallying 7 dollars. Yet it still offers greater income than other safe credits, at over 2 notches cheap according to our calculations, thus it yields as much as your typical Baa2 bond or conversely has the prospect of generating 9% in return and yield should it move to fair value.