As concerns about the coronavirus epidemic from China has gripped markets, observers have struggled to find historical analogies to predict the likely impact on economic growth. Many have focused on prior global health emergencies, like the H1N1 swine flu and SARS, but a new analysis suggests those episodes may not provide the best comparisons.
Ned Davis Research analysts “looked at how two more meaningful economic shocks impacted the Treasury market,” wrote Chief Global Macro Strategist Joseph Kalish in a note summarizing their findings.
In contrast to the way the bond market reacted to previous health shocks, which are “more contained,” as Kalish put it, the two “more meaningful” events had weightier impacts.
Those two events were the terrorist attacks of September 11, 2001, and the Japanese earthquake and tsunami of March, 2011. After the 9/11 attacks, “Some economic activity seemed to stop, with people refusing to travel or go out,” Kalish wrote. After the tsunami hit on March 11, global supply chains were disrupted.
U.S. Treasury prices rallied and yields fell for up to two months after each event, Kalish wrote, noting the same caveat that many analysts have used in assessing the COVID-19 infections: there’s no way to know how the medical episode will play out, let alone the after-effects.
What’s more, a Ned Davis tracker of sentiment in the Treasury market “suggests there is more to go on the upside,” Kalish wrote.
The chart above shows the benchmark 10-year Treasury yield TMUBMUSD10Y, -1.23% for 12 months before and after each of the two events. When bond yields decline, it can be beneficial for borrowers like homeowners.
Low yields can also be a reminder that something is amiss in the economy though, and that can unsettle investors in other parts of the market. On Tuesday, the 10-year U.S. Treasury note briefly touched an all-time low, helping accelerate a stock market sell-off. And, as Kalish notes, they can be a signal that investors anticipate central bank interest rate cuts or other policy changes.