Bond Report: 10-year Treasury yield nears record low as coronavirus concerns spark global stock rout

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Treasury yields were seeing a precipitous drop on Monday as panic in global stock-markets over the COVID-19 outbreak has stirred demand for U.S. government paper, one of the most popular haven assets for overseas investors.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -6.61% slid 7.3 basis points to 1.397%, its lowest since July 2016, while the 2-year note rate TMUBMUSD02Y, -6.38% dropped 6.3 basis points to 1.287%. The 30-year bond yield TMUBMUSD30Y, -4.57% tumbled 6.8 basis points to 1.849%.

If the benchmark 10-year rate falls a few more basis points, it will surpass the previous all-time closing low of 1.32% set on June 2016. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

U.S. stock futures, along with European and Asian equities, unraveled to kick off the week’s trading, driving investors to the perceived safety of bonds. The S&P 500 SPX, -1.05% and the Dow Jones Industrial Average DJIA, -0.78% are pointing to a sharply lower open for Wall Street on Monday.

This comes as the rapidly rising number of confirmed cases of COVID-19 in Italy, Iran and South Korea have raised fears that virus epidemic could turn into a global pandemic soon. There are now 79,339 cases of COVID-19—the infectious disease derived from the novel strain of coronavirus that reportedly originated in Wuhan, China last year— in 30 countries and 2,619 deaths, according to the latest figures from the World Health Organization.

See: Italian stocks slump 4%, as European equities crumble on spreading coronavirus

Expectations for disruptions in global supply chains run high as transportation links in Asia are shut down and factory production lines struggle to return to full-capacity.

The International Monetary Fund said on Saturday the coronavirus would trim 0.1% off global growth, and lower China’s economic growth rate to 5.6% this year.

The slide in long-term bond yields also reflects the surge in betting on the Federal Reserve to ease monetary policy this year. Pricing in fed-fund futures markets, which reflects market expectations for coming rates, show expectations for a half-a-percentage-point worth of cuts in 2020.

Meanwhile, the economic calendar is light on Monday, with the January readings of the Chicago Fed’s national activity index due at 8:30 a.m. Eastern. Cleveland Fed President Loretta Mester is scheduled to deliver remarks at 3 p.m. Eastern.

Read: Prepare now for the post-coronavirus bond market, this investor says

What did market participants’ say?

“Bond yields and commodities opened the final trading week of February sharply lower on news that the coronavirus has spread to the Gulf and Italy, prompting a new round of risk aversion across global markets,” said Kenneth Broux, a strategist at Société Générale, in a Monday note.

“The [Fed’s] narrative may soon have to turn more dovish if incoming data dovetails with the anecdotes of companies and confirm, that the US economy is no longer immune to the slowdown in Asia,” said Broux.

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