Via Financial Times

US Treasury yields slid to new lows in Asia while stock markets rebounded as investors pinned their hopes on central banks unleashing a wave of easing measures to cushion the economic hit from the coronavirus outbreak.

Japan’s Topix added 1.1 per cent on Monday morning, while China’s CSI 300 of Shanghai- and Shenzhen-listed stocks gained as much as 3 per cent — on pace for its best one-day gain since June — after the Bank of Japan signalled that it would inject liquidity into the financial system and hinted at increased asset purchases. 

The BoJ “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases,” Haruhiko Kuroda, the central bank governor, said in a statement.

S&P 500 futures added 0.9 per cent, while contracts for London’s FTSE 100 stock benchmark were up 2.4 per cent.

Equities initially sold off across Asia after China’s official manufacturing purchasing managers’ index at the weekend showed factory activity plunged to an all-time low in February, as the coronavirus knocked swaths of economic activity offline.

Line chart of Yield on 10-year government bonds (%) showing US Treasury yields tumble towards 1% as odds of Fed cut rise

In early trading on Monday the yield on 10-year US Treasuries fell as much as 11 basis points to 1.0347 per cent, a new record low, before pulling back to be down 3 basis points. Yields fall as bond prices rise.

After the S&P 500 last week dropped 11 per cent, marking the Wall Street benchmark’s worst week since the global financial crisis, investors are now betting that central banks will step in to try and mitigate the crisis that is threatening global economic growth. 

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Based on trading of Fed funds futures, investors now think it is almost certain that the Federal Reserve will cut interest rates when it meets later this month. Chairman Jay Powell has said the US central bank is “closely monitoring” developments.

Analysts at Pimco said on Monday that they expected the Fed would cut rates in March and “keep the door open for further cuts as needed,” including a potential 50-basis-point cut. “Policymakers want to avoid a more disorderly tightening of financial conditions that could further exacerbate the economic shock,” they added.

Goldman Sachs projects the Fed will cut by 0.5 percentage points in March and another 0.5 percentage points in the second quarter. 

Governments are taking action to support their economies during the outbreak. Italy said it will inject €3.6bn into its economy to mitigate the outbreak’s impact.

Goldman analysts wrote on Sunday that they were “forecasting rate cuts by most other G10 [and some emerging markets] central banks, including a cumulative 100 basis points of cuts in Canada, 50bp in the UK, Australia, New Zealand, Norway, India and South Korea, and 10bp in the Euro area and Switzerland”.

The brighter mood also buoyed crude oil, with the price of Brent — the international marker — climbing 3.8 per cent to $51.54 a barrel.

China’s onshore-traded renminbi strengthened to 6.9666 per US dollar after the central bank set the midpoint of the currency’s trading band to below seven for the first time in more than a week. 

Additional reporting by Robin Harding in Tokyo

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