The Tell: Don’t expect the 10-year Treasury yield to hit rock-bottom even if a recession hits, says Bank of America

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With the U.S. Treasury 10-year yield making a historic plunge below 1% on Tuesday, investors are now debating the potential for the bond-market’s benchmark yield to fall further.

But even if the Federal Reserve cuts interest rates again, the benchmark maturity’s yield is unlikely to go much lower if only because the potential for a recession has been partly baked into the bond-market, according to a Wednesday note by Bank of America Global Research.

Based on the New York Fed’s recession forecasting model, which tracks the yield spread between the 3-month bill and 10-year note, the bond-market is already pricing in a more than 30% chance of a recession.

If U.S. economic growth does end up shuddering to a halt, they argue that the 10-year Treasury note yield TMUBMUSD10Y, -0.66%   is likely to hang in a range between 0.50% to 0.80%, but if growth resumes quickly after a weak first-quarter, the 10-year yield could end as high as 1.75% by the end of the year.

Faced with those two sharply diverging economic possibilities, Bank of America said it was likely the benchmark bond would trade at the lower end of a range between 1.00% to 1.25%, around where it is currently trading.

The 10-year note was at 0.96% on Wednesday, a day after it made a historic plunge below 1% following the Fed’s first emergency interest rate cut since the 2008 financial crisis.

See: The 10-year Treasury note yield just broke below 1%. Here’s how it happened

Once seen as a far-fetched outcome by U.S. money managers, the sea of negative yielding government bonds in Europe and Japan, and heightened fears about the economic impact of the COVID-19 epidemic, have forced investors to contemplate the possibility that the 10-year yield will converge with its peers in Europe and Japan and fall to zero percent.

And as the number of confirmed cases in the U.S. has risen, investors are now worried that the potential panic from the spread of the virus and efforts to contain its dissemination could crimp consumer activity, the linchpin of the U.S. expansion.

Still, Bank of America analysts say that until the coronavirus impact starts materializing in the hard data, opening up a path for the Fed to deliver further interest rate cuts, it was difficult to see the 10-year yield falling significantly below the 1% mark.

The slide in the benchmark maturity so far is “reflective for the most part of expectations for the potential impact of the outbreak, with very little in the way of hard data to guide the market on what that impact may be,” they said.

In U.S. economic data Tuesday, Automatic Data Processing Inc. reported private-sector employers added 183,000 jobs in February, while the U.S. Labor Department will report on nonfarm payrolls and unemployment on Friday. Meanwhile, the Institute for Supply Management reported its nonmanufacturing gauge in February rose to 57.3% from 55.5% in the previous month, suggesting that the services sector had yet to feel the blow from the coronavirus epidemic.

In other markets, the S&P 500 SPX, +2.71%   and the Dow Jones Industrial Average DJIA, +3.00%   were headed for a more than 2% increase on Wednesday, following a string of Democratic primary victories for former Vice President Joe Biden.

The resurgence of Biden’s campaign has ameliorated fears of Bernie Sanders’ candidacy, whose agenda is seen as a risk to big businesses, and sectors like healthcare and financial services.

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