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The stock market has risen by 25% since the Fed announced its QE-infinity program on March 23, committing to buy an uncapped amount of U.S. government debt for an unspecified amount of time, but 2020 has been all about the surge in U.S. Treasuries.
The big picture: Already seeing a bid this year as bond investors piled in because of early fears about the coronavirus and the U.S.-China trade war, long-dated Treasuries have been the world's best performing major asset class this year by a wide margin.
What happened: The Fed's decision to restart its bond-buying program and ratchet its balance sheet to a record $6.62 trillion as of Thursday helped offset a global liquidity freeze and end a mad dash for cash across markets.
- In addition to propping up the market, that allowed Treasuries to benefit from the collapse in commodities like oil.
- "It's a continued flight to quality," Seaport Global Holdings managing director Tom di Galoma told Reuters earlier this week. "Investors are looking for a safety asset, and Treasuries happens to be that."
By the numbers: Yields on benchmark 10-year notes have fallen by around 27 basis points since March 23, while yields on 3- and 5-year notes have hit all-time lows this week. (Yields fall as prices rise.)
- Year to date, 10-year yields have fallen 132 basis points, with 3- and 5-year yields declining by a similar amount.
- Yields on the 30-year bond have fallen by 121 basis points.
Between the lines: The move in the Treasury market also reflects investors' historically low expectations for inflation, even in the face of record spending by Congress that likely has already pushed the U.S. annual budget deficit over $4 trillion for 2020.
Reality check: That's because the new spending is "unproductive debt," say Van Hoisington, lead manager of the Wasatch-Hoisington U.S. Treasury Fund, and Lacy Hunt, the firm’s chief economist.
- "The U.S. had a debt overhang problem even before the coronavirus," Hunt told Bloomberg. "It won’t be productive debt, and will not generate future growth. So inflationary expectations will turn into deflation expectations, and the entire yield curve is going to be pressed down on to the zero bound."
- The Wasatch-Hoisington has earned 29% in 2020, Bloomberg reports — outpacing all its peers and rivaling some hedge funds — by betting on long-dated Treasuries.
The bottom line: The run in Treasuries, especially longer-dated maturities, could have further to go, as expectations for the economy to rebound are pushed out further.