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Global Rush to Safety Sends Treasury Yields to Lowest Since 2016

Global Rush to Safety Sends Treasury Yields to Lowest Since 2016

Monday, 24 February 2020 03:36 PM

U.S. Treasury yields fell on Monday to their lowest levels since 2016 as investors sought safety in government bonds amid fears the coronavirus epidemic could do more economic damage than predicted.

The curve inversion between the 3-month and 10-year bond yields also deepened in what has been seen as a potential recession signal. Investors dumped equities as they perceived a risk that China's coronavirus outbreak will grow into a pandemic, with disruptive and deadly consequences around the world, as the number of infections rose sharply in South Korea, Italy and Iran.

"It's a flight to quality," said Ellis Phifer, market strategist for Raymond James in Memphis, Tenn. He noted that bond yields have fallen sharply since late last year, when the 10-year was approaching a 2% yield. In contrast, U.S. equities indexes had mostly risen until Monday, when the S&P 500 fell around 3%.

"The bond market has been a little ahead of this," a reason bond yields did not fall further on Monday, Phifer said. As investors sold stocks and rushed for safe-haven assets, the 10-year Treasury yield was down 11.6 basis points to 1.3538% after earlier hitting 1.352% - its lowest since the summer of 2016. Its all-time low of 1.321% was reached on July 6, 2016.

The 30-year Treasury yield touched a record low at 1.811% , and was down 10.5 basis points at 1.8122% in afternoon trading on Monday. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 10.7 basis points at 1.2435% -- its lowest since May 2017.

Speaking at a news conference in Geneva, World Health Organization Director-General Tedros Adhanom Ghebreyesus said a sudden increase in coronavirus cases in Italy, Iran and South Korea were "deeply concerning" but for now authorities were not seeing an uncontained global spread of the virus or witnessing widespread serious cases or deaths.

"The key message that should give all countries hope, courage and confidence is that this virus can be contained, indeed there are many countries that have done exactly that," he said at a news conference. Italy is racing to contain the biggest outbreak of coronavirus in Europe, sealing off the worst-affected towns and banning public events in much of the north as a fourth patient died of the illness.

Justin Onuekwusi, a portfolio manager at Legal & General Investment Management, said that while the U.S. economy has been relatively robust so far, "The U.S. Treasury market is pricing that the world economy is going to be flirting with sub-2% growth."

World growth falling below 2% is generally considered equivalent to recession, taking into account population growth and poor countries' need for faster expansion. Focus is likely to turn to the yield curve - the gap between short- and long-dated bond yields. Curve inversion, when short-dated borrowing costs are higher than those further out, is considered a potential gauge of U.S. recession.

The 3-month/10-year curve was at its most inverted since October at negative 19 basis points while the 2-year/10-year curve is inching that way, standing at just 11 basis points, also its flattest since October.

Negative sentiments rose after purchasing managers' index (PMI) surveys on Friday showed U.S. business activity in both the manufacturing and services sectors stalled in February, the latter slipping to its lowest since 2013. "The shock contraction in the U.S. service sector brought home how close we might be to recession because of the coronavirus," London and Capital Group told clients.

In U.S. politics the self-avowed democratic socialist Bernie Sanders dominated the Nevada caucuses on Saturday, leading to pressure on the stocks of U.S. health insurers who could be squeezed out under his Medicare for All plan. Edward Moya, senior market analyst for brokerage OANDA, said Sanders' victory likely did not have a broader market impact on Monday, ahead of more significant state contests next week.

Even if Sanders emerges as the Democratic nominee, Moya said, "Wall Street is pretty convinced that Trump would easily beat Bernie."

© 2020 Thomson/Reuters. All rights reserved.

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Traders are preparing for the worst as the coronavirus spreads across national borders, stoking fears about its economic impact.Investors snapped up U.S. Treasuries, sending the yield on 10-year securities to the lowest level since 2016.
bonds, treasury, yields, virus
Monday, 24 February 2020 03:36 PM
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