Friday6 March 2020 ★ FINANCIAL TIMES 19
MARKETS & INVESTING
H U D S O N LO C K E T T —H O N G KO N G
Supply disruptions from the coronavi-
rus epidemic have pushed Chinese
piglet prices to record highs as farmers
bet that a domestic pork shortage will
persist even after China’s economy gets
back up to speed.
China, thebiggest producer and con-
sumer of pork, saw its domestic hog
herd shrinkmore than 40 per cent last
year and production drop by more than
a fifth afterAfrican swine fever oret
throughfarmsacrossthecountry.
As of January, Chinese pork prices
were up 116 per cent year on year, even
asBeijingattemptedtocushiontheblow
during the lunar new year holiday by
releasing 10,000 tonnes of pork from
statereserves.
Beijing released another 20,
tonnes of frozen meatyesterday while
agriculture ministry officials told
reportersthat“despitetheimpactofthe
coronavirus epidemic... we are
confident annual production of hogs
willfundamentallyrecover[in2020]”.
But thecost of pork t wholesale mar-a
kets in China has climbed 16 per cent in
the year to date as measures to stop the
vir us have disrupted supply chains vital
toshippingpigsfromfarmtomarket.
Prices for piglets — which take about
six months to grow large enough for
slaughter — have jumped to a record
Rmb84 ($12.1) per kilogramme on
surging demand from farmers, who
believeporkpriceswillstayhighoreven
increasefurtherthisyear.
Ernan Cui, a China consumer analyst
at Gavekal Dragonomics, said the coun-
try’s pig herds would remain under
threat from swine fever because biose-curity standards at many farms
remained below levels that would fully
haltthespreadofthedisease.
Ms Cui added that, while coronavirus
control measures had constrained the
availability of pork and potentially
made hog farming more lucrative in the
short term, “it’s still a risky business
right now”. Farmers who had restarted
production, she warned, might see their
herdsonceagaindestroyedbydisease.
China hog herds may also be at risk of
infection from wild boars, which have
been aconcern for Europe’s pork indus-
try but have not cted as key carriers ofa
the disease in China. On Tuesday, the
agriculture ministry confirmed that
seven infected boars had been found
dead inHubei, also the centre of the
country’scoronavirusoutbreak.
Michelle Lam, Greater China econo-
mist at Société Générale, said the state
had prioritised restoring transport
logisticsas part of a push to help the
economyrecoverfromdisruption.
This means that upward pressure on
pork prices could ease within a few
months, she said. At best, she estimated
that the cost of hogs might begin to edge
downaroundthemiddleoftheyear.Commodities
China piglet prices surge to record
on virus supply chain disruption
DAV I D S H E P PA R D, D E R E K B R OW E R
A N D A N J L I R AVA LThe coronavirus outbreak has led the
biggest oil traders to slash their projec-
tions for growth in global demand to
the weakest levels since the financial
crisis, with many expecting consump-
tion to stay steady or even shrink in
2020.Vitol,Trafigura nda Gunvor, which
together shift almost 15m barrels of oil
each day through their vast trading
operations, all now see demand either
flatlining or growing only marginally
thisyear.
Consumption could even contract,
they warned, if the virus is not con-
tained rapidly and continues to weigh
oneconomicactivity.
Consultancies have already sharply
cut their forecasts or global oil demandf
growth in 2020. But the projections
from traders more intimately involved
in the market will add pressure onOpec
and Russia to agree deep cuts in output
as they meet over the next two days to
arrestcrude’s fall rom $70 to $50 af
barrelsinceJanuary.
Opec reached a preliminary agree-ment yesterday to cut output by 1.5m
barrels a day in conjunction with its
allies but still needs to secure the sup-
portofRussiatoday.
“We’realotclosertozerogrowthinoil
demand for 2020 than we ever thought
we would be,” said Ben Luckock, Trafig-
ura’s co-head of oil trading, arguing that
the impact of the virus was greater than
manyanalystshadexpected.
Trafigura expects demand to beseverely depressed for most of the first
half before recovering by the end of the
year.
“It takes a while to filter through the
system but it could be disastrous for
demandinMarch,”MrLuckocksaid.
Sincethebeginningofthecommercial
oil market in the 19th century, it has
been rare for annual demand to drop
with contractions generally limited to
recessions, as in 2008, or dramaticspikes in price, such as during the Arab
oilembargoesofthe1970s.
Demand hit a record 100m barrels a
day in 2019 and before the viral out-
break had been expected to grow by at
least1mb/dthisyear.
Torbjorn Tornqvist, chief executive of
Gunvor, said global oil demand had
already dropped by about 2m b/d in the
first quarter because of the impact of
coronavirus and a mild winter in the
northernhemisphere.
“The full impact of the virus’s spread
on demand remains difficult to know
becausesomuchridesonwhetheritcan
be curtailed this spring and when things
start to normalise,” Mr Tornqvist said.
“But for now, we expect either a small
contractionoronlyverymildgrowthfor
theyearasawhole.”
Vitol, the world’s largest independent
oil trader, believes China’s demand fell
asmuchasathirdor4mb/d,atthepeak
ofthelockdownsinthecountry.
The trading house now sees oil
demand growing by less than 0.5 per
cent this year, if at all, in the wake of
smaller scale restrictions likely to be
implemented in Europe and North
America.Commodities
Biggest oil traders warn of weakest
demand growth since financial crisis
‘We’re a lot closer to zero
growth in oil demand
for 2020 than we everthought we would be’
Farmers believe pork prices will stay
high or even climb further this yearFastFT
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ft.com/fastftC O L BY S M I T H— N E W YO R K
In the wake of the first emergency
interest rate cut from the US Federal
Reserve since the global financial crisis,
investors have begun to grapple with a
question that was once not even in the
back of their minds: could US Treasury
yieldsfalltozero?
On Tuesday, the central bank slashed
its main policy rate by half a percentage
point, bringing it down to a range
between1percentand1.25percent.
The move came in response to
the fast-spreading coronavirus and
prompted talk that theBank of England
and theEuropean Central Bank ouldw
soonfollowsuitwitheasingmeasures.
Market reaction to the Fed’s cut was
swift and at timesunforgiving, suggest-
ing investors thought moreradical
actions ouldbeneeded.w
US stocks fell dramatically and the
benchmark 10-year Treasury yield fell
below1percentforthefirsttime.
Thatsharpdropinthe10-yearyield—
which at the end of last year sat at 1.
per cent — has raised the prospect that
rates could soon close in on zero, joining
Japan nd the euro area in the deepa
freeze.
“Everything is on the table,” said Jim
Caron, senior portfolio manager for
global fixed income at Morgan Stanley
InvestmentManagement.
Bets have piled higher for additional
cuts in rates, not only at the Fed’s
scheduled meeting in two weeks but
onceagaininApril.
Two quarter-point reductions would
bring the Fed’s policy rate tobetween
0.5percentand0.75percent.
Joyce Chang, chair of global research
at JPMorgan, said her teamsaw a 50 per
cent chance of policy rates in the US
droppingtozerothisyear.
Philip Marey, senior US strategist at
Rabobank,expects the Fed will hit zero
as early as June while Michelle Girard,
co-head of global economics at NatWest
Markets, said she could see that hap-
peningasearlyasnextmonth.
As a result, Treasury yields seem
likely to head down from here, said
Nathan Sheets, chief economist for
PGIMFixedIncome.
“As long as the Fed keeps rates very
low, the long end of the curve will at
timesbeprettyclosetozero,”hesaid.
According to Kathy Jones, chief fixed-
incomestrategistatCharlesSchwab,the
“not unreasonable” expectation that
policy rates go to zero suggests two-year
yieldsorfive-yearyieldscouldturnneg-
ativewhilethe10-yearnotecouldseeits
yield drop another 0.5 percentage
points.Such moves would bring America’s
government bond market closer to
equivalents in Europe where the ECB
has applied anegative rate o commer-t
cial banks’ excess deposits since June
2014, part of an effort to stir economic
activity.
The Bank of Japan, meanwhile, has
had a similar policy in place for four
years. Japanese government bonds
maturing in 10 years now yield minus
0.13 per cent while those in Germany
yieldminus0.64percent.
That means that buyers are certain to
get back less than they paid, via interest
andprincipal,iftheyholdtomaturity.
FortheyieldontheUS10-yearnoteto
flirtwithzero,MsJonessaidtherewould
need to be “a very serious fear” of the
inflation rate turning negative amid a
severe recession, along with considera-
tion of negative policy rates from the
Fed.
Rick Rieder, BlackRock’s chief invest-
ment officer of global fixed income who
oversees the group’s $2.3tn bond portfo-
lio, said hedid not expect the centralbank to use this tool, however, given
therewas “very questionable, if any,
benefit”indoingso.
Mr Rieder added: “You haven’t seen
growth and inflation move markedly
higher in Europe and Japan. The Fed
needs to be really careful, going that
far.”
Fed chairman Jay Powell has pushed
back on the idea of negative interest
ratesintheUS,notinglastyearthatsuch
a policy would be abetter fit or econo-f
mieswithlowgrowthandlowinflation.
Instead, he has said the Fed would
looktolarge-scalepurchasesofassetsor
“forward guidance”, the practice of
explicitly telling investors what it plans
to do and when. Minutes of meetings
suggest Mr Powell has the support of
mostFedpolicymakers.
Finding ways to push down longer
term interest rates could, in fact, be the
Fed’s preferred option. Governor Lael
Brainard hasproposeda Japan-style
“yield curve control”, where the Fed
sendsshort-termratestozero,thenputs
caps on medium-term yields as well, as
a kind of credible promise that it will
keeprateslowerforlonger.
Sustained low yields could force
investors to move into riskier corporate
debt in search of income, some analysts
sa id. But the US Treasury market still
stands out, in an environment in which
$14tn of bonds are yielding less than
zero.
Ashish Shah, co-chief investment
officer for fixed income at Goldman
Sachs Asset Management, said US rates
werestillhighenoughtoappealtoinves-
torsaroundtheworld.
“Fewer and fewer government bond
marketsarepositivelyyielding,”hesaid.
“The US is still beachfront property
whenitcomestotheworldofbonds.”
Additional reporting by Brendan GreeleyReaction to this week’s Fed
rate cut suggests expectations
are high for more radical action
‘The US
is stillbeachfront
propertywhen it
comes tothe world of
bonds’Federal Reserve
chairman
Jay Powell has
played down
suggestions of
negative interest
rates in the US
Kevin Lamarque/ReutersFixed income. mergency easingE
Investors in US Treasuries
face prospect of zero yields
J O E R E N N I S O N —LO N D O N
E R I C P L AT T— N E W YO R KCorporate bond sales have resumed
following aweek-long hiatusas debt
markets regained their footing after a
sharp sell-off triggered byfears over the
spreadofcoronavirus.
Paint companySherwin-Williams no
Tuesday announced the first
investment grade bond sale in the US
after last week’s drought ith a host ofw
othersfollowingsuit.
The US action came after a batch of
debt deals in Europe on Tuesday morn-
ing,includinga€1bnbondforUSindus-
trial companyHoneywell. On Wednes-
day, more than a dozen deals were
announcedinbothregions.
Despite higher credit risk premiums,
falling interest rates have helped keep a
lid on borrowing costs for companies.
The yield on a benchmark high-yield
bond index run by Ice Data Services fell
0.2 percentage points to 5.88 per cent on
Tuesday.
The benchmark 10-year Treasury
yield plummeted below 1 per cent for
the first time on Tuesday after the
Federal Reserve cut its policy rate by 0.
percentage points to support the US
economy in the face of the virus out-
break.
“The Fed move drove up volatility in
the market but I do think fundamen-tally this intervention will be viewed
as good for credit,” said Rupert Lewis,
head of European syndicate at BNP
Paribas. “Even if it’s just that, there is a
lot more cheap money coming into the
market.”
The Fed’s emergency cut followed
supportive statements from finance
ministers and central banks across the
globe as the G7 countries co-ordinated
theirmessagetomarkets.
“That was enough to give markets a
boost,” said Marco Baldini, head of
European bond syndicate at Barclays.
“It was enough to get issuance
resurrectedbothinEuropeandtheUS.”
Demand from investors for new deals
appearedtobestrong.
Relx, an analytics company, sold debt
across three tranches on Tuesday, a
€500m 12-year bond, an €800m
eight-year bond and a €700m four-year
bond with multibillion dollars’ worth of
orders for each tranche, according to
people with direct knowledge of the
debtsale.
Meanwhile, other corners of capital
markets remained closed. Record label
Warner Music nd shoe makera Cole
Haan ave both delayed long-plannedh
publiclistingsthisweek.
“Ithinkyouhaveawindowhere,”said
Andrew Brenner, head of international
fixed income at National Alliance Secu-
rities. “I can’t say how long it will stay
open. It could be a day, it could be a
month but it could be the rest of the
year.”Fixed income
Corporate
bond sales
resume after
sharp sell-off
‘The Fed drove up market
volatility but I do think
this intervention will beviewed as good for credit’
Could US Treasury yields fall to zero?
-year yield ( ) Apr
Source: BloombergMarMARCH 6 2020 Section:Markets Time: 5/3/2020- 19:01 User:keith.allen Page Name:MARKETS1, Part,Page,Edition:EUR, 19, 1