By Paul J. Davies
Treasury yields dropped further Thursday on the challenges facing the U.S. recovery, but yields on European government debt fell faster after Germany reported a record quarterly economic contraction.
The Federal Reserve highlighted the long-term problems the economy faces when it kept interest rates unchanged on Wednesday. Investors noted that economic momentum has slowed recently as America struggles to control the coronavirus pandemic.
In Europe, however, the German economy's 10.1% contraction in the second quarter weighed more heavily on yields. 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 0.553%, from Wednesday's close of 0.571%, according to Tradeweb. They rose later to 0.563%, on course for their lowest ever close except for one extremely volatile day in early March when yields closed at 0.498%.
In Europe, German 10-year yields were at minus 0.536%, 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 price moves contrast 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.
There is already evidence of a loss of momentum in U.S. economic activity in the likes of 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 0.125% Thursday, from Wednesday's all-time low of 0.129%.
Write to Paul J. Davies at firstname.lastname@example.org