The 10-year US Treasury yield slid towards 1 per cent for the first time, as investors sought haven assets during the deepening coronavirus crisis and placed bets on monetary policy support to mitigate some of the impact.
The yield on the benchmark US government bond dropped to a low of 1.03 per cent on Monday, before edging back up to 1.09 per cent. Other US government bond yields were also in freefall, with the two-year yield dropping almost 0.17 percentage points to 0.74 per cent in the biggest one-day fall since March 2009. Yields fall when prices rise.
The 10-year yield is among the most important benchmarks in global finance, underpinning borrowing and savings rates around the world. Seema Shah, chief strategist at Principal Global Investors, said 1 per cent was a “mental line in the sand”.
“Once the 1 per cent level is passed, you could see a bigger move lower as people start to lose confidence in the economic outlook,” she said. “People have been talking about negative rates in the US and at the beginning of the year it seemed unlikely, but it has started to become part of the normal conversation.”
The moves lower reflected fears over slowing global growth and solidifying expectations that the US Federal Reserve will be forced to cut interest rates in an attempt to support financial markets and soften the economic blow. The benchmark S&P 500 equity index has lost more than 10 per cent since coronavirus concerns intensified at the beginning of last week.
Futures markets are pricing in at least one quarter point cut in the Fed’s target interest rate when the central bank meets this month, with some investors betting that it could cut rates by half a point for the first time since December 2008. Ryan Wang, US economist at HSBC, said he expected the Fed to slash its benchmark policy rate even further by June, by a cumulative 0.75 percentage points.
Expectations of policy action were entrenched by a deep “inversion” on Monday between the three-month Treasury yield and the two-year yield.
The three-month yield stood at 1.14 per cent, down from more than 1.5 per cent at the beginning of last week. With the two-year more than 0.3 percentage points lower, the curve reinforced expectations of interest rate cuts on the horizon.
“It is inevitable there will be some kind of move not just from the Fed, but all central banks, especially now that markets are demanding it,” said Ms Shah.
But she cautioned that easing monetary policy may have a limited impact in the face of the intensifying coronavirus outbreak, which has now claimed more than 3,000 lives and infected nearly 90,000 globally, according to a database from Johns Hopkins University.
“Central banks can’t do much. They may be able to provide a little bit of support and ease liquidity conditions but they are limited,” said Ms Shah. “We could see a greater impact on markets if we saw a fiscal response from governments.”