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- Investors bought up US government bonds on Monday in response to the growing coronavirus threat and signs of a brutal price war between oil producers.
- The entire US Treasury yield curve fell below 1% for the first time ever as yields on the benchmark 10-year and 30-year bonds slumped to record lows.
- “It signals the market is worried about a global recession and aggressive monetary easing by the Fed,” one analyst told Business Insider.
- The yield declines came as investors ditched stocks, commodities, and cryptocurrencies and braced for the Federal Reserve to make further cuts to interest rates.
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Investors plowed cash into US government bonds on Monday as they braced for the global economic fallout from coronavirus and a brutal oil-price war after Saudi Arabia and Russia failed to agree on output cuts.
Surging demand drove up the price of US Treasuries, dragging down their yields and sending the entire yield curve below 1% for the first time ever. The yield on the benchmark 10-year Treasury touched a record low of less than 0.4%, while the 30-year Treasury yield slid below 1% — an unprecedented event.
Joe Ciolli / Business Insider
The falling curve underscores the worsening outlook for the world economy.
“It signals the market is worried about a global recession and aggressive monetary easing by the Fed,” Neil Wilson, chief market analyst for Markets.com, told Business Insider in an email on Monday.
“It will eventually settle down and the real risk is when rates snap back,” he added.
The fall in bond yields is a product of investors fleeing volatile markets and seeking shelter in government bonds. They sold off oil and ditched stocks, commodities such as silver and soybeans, and even cryptocurrencies on Monday as they worried about coronavirus hitting global demand and an oil-supply glut.
Moreover, the fact that investors are willing to buy bonds offering record-low yields underlines how worried they are about a global slowdown and a widescale sell-off of higher-risk assets.
Coronavirus — which causes a flu-like disease called COVID-19 — has infected more than 110,000 people, killed at least 3,800, and spread to more than 100 countries. It continues to disrupt global supply chains, interfere with businesses — factories are slashing output, events are being canceled, and retailers are temporarily closing or reducing their opening hours — and hammer demand as consumers stay home.
The epidemic’s sweeping impacts led the Organization of Economic Cooperation and Development (OECD) to warn global growth could slow to 1.5% this year — half the rate it projected in November. Similarly, the International Monetary Fund expects global growth of less than 2.9%, after predicting 3.3% in January.
Bracing for Fed action
When interest rates fall, bond prices tend to rise — driving down yields — as investors chase a better return by moving money into government bonds instead of keeping their cash in the bank and collecting paltry interest.
The scale of the latest yield declines suggests that investors expect the Federal Reserve to cut interest rates again. The US central bank made an emergency cut of 50 basis points to interest rates last week to shore up the economy against coronavirus.
Indeed, futures signal that investors put the odds of another cut this month at 100%, according to Reuters. With rates already at 1% to 1.25%, the Fed has little scope for further cuts before they hit zero. Against that backdrop, a 30-year Treasury yield of about 0.9% starts to look enticing.
The yield declines also suggest investors are expecting the Fed to boost liquidity in market by ramping up its bond purchases, which would drive up their prices and lower their yields.