The 10-year Treasury yield (^TNX) is close to its all-time low.
The July 8, 2016 record low of 1.358%, reached just weeks after the seismic Brexit vote, could be breached if trade tensions get worse, according to Charlie Ripley, senior investment strategist at Allianz Investment Management.
On Wednesday, the 10-year Treasury yield moved just below 1.6%, its lowest level since 2016, after yielding over 2% roughly one week ago. On Thursday, the yield started to show signs of life, moving back above 1.7%
Ripley said the 10-year yield has moved lower in recent trading sessions amid a flight to quality sparked by the aforementioned trade skirmishes between the U.S. and China and larger than expected interest rate cuts from central banks in India, Thailand and New Zealand on Wednesday.
“Things moved a little too far too fast,” Ripley said, referring to the plunge in the 10-year yield over the past week.
Still, the trade war with China is showing few signs of abating, with President Trump set to impose a 10% tariff on the remaining U.S. imports from China starting Sept. 1.
But Ripley expects the 10-year yield to end 2019 between 2% and 2.5%, representing a sizable rebound from its current level.
“We’ve had this [10-year yield] target since the second quarter,” he said, adding that none of the recent macro developments are prompting Ripley to change his target.
While Ripley acknowledged that lower rates make stocks more attractive in the short-term, the longer-term stock market implications can be more complicated, as a falling 10-year yield is usually a signal of slowing economic growth.
“If this is a situation where [economic] growth continues to deteriorate, it could have a feedback loop in the corporate market, which could lead to lower profits and stock prices,” he said.
Longer-term rates outlook
Aside from trade tensions,, the next U.S. recession could also push the 10-year yield to new record lows.
“Whenever the next recession does come, I'm quite confident we'll take out the all-time lows,” said Brian Rehling, co-head of global fixed-income strategy at Wells Fargo Investment Institute.
Rehling expects rates to stay low for the short, intermediate and long-term.
The expectations for lower rates doesn’t just apply to the U.S.
Capital Economics echoed the “lower for longer” sentiment in a note to clients on Wednesday, writing: “While our end-year forecasts for bond yields are generally above their current levels, the bigger picture is that we expect them to rise only marginally, and the downside risks to our projections are building.”
The analysts say there is roughly $15 trillion worth of government debt across the globe yielding less than 0%.
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