Bond Rally Takes Breather Despite Coronavirus Fears
January 28 2020 - 5:00PM
Dow Jones News
By Julia-Ambra Verlaine
A global bond rally paused Tuesday after fears around the
fallout from a viral outbreak in China pushed yields on U.S.
government debt to their lowest levels in months.
The yield on the benchmark 10-year Treasury recovered to 1.642%
Tuesday after bottoming at 1.57%, according to Tradeweb. That is up
from 1.605% Monday and snaps a three-trading-day losing streak.
Some investors said they were waiting for more information
before evaluating the potential economic damage from the
coronavirus's spread. They said it would take a pandemic to dent
global consumption and growth.
"To the degree coronavirus is symptomatic of...unknowns in the
marketplace, it is way too premature to assess a view around a
recession, " said Bob Browne, chief investment officer at Northern
Trust Corp. "You need to see a marked slowdown in U.S. economic
growth."
In one sign investors haven't given up riskier assets, many are
holding on to junk bonds. Both Northern Trust and Aviva Investors
said that they remained in high-yield bonds and that it would take
a more severe drop in stocks before reconsidering.
Investors often sell lower-rated debt when they are nervous
about the economy.
"The virus is not causing us to change positioning yet," said
Kevin Matthews, the global head of high yield at Aviva Investors,
an asset manager with $440 billion under management.
While analysts haven't dismissed the severity of the virus, some
have noted that markets are increasingly facing external stresses
such as extreme weather and geopolitical events. The Bank for
International Settlements said climate-related risks could be a
potential source of the next financial crisis in study published in
January, dubbing them "green swans."
"Coronavirus has become the proximate driver -- it is the latest
hamster spinning the macro risk wheel around," said Alex Roever,
head of U.S. rates strategy at JPMorgan. "Two weeks ago it was
Middle East tensions, and two weeks on it may be something else.
The bond markets were quite sensitive to macro risks before the
virus, and are likely to remain that way."
Investors and analysts are also studying previous outbreaks as
point of reference -- even though many aren't entirely comparable
given different mortality rates, incubation periods and rates of
transmission.
Charles Schwab analysts found the MSCI World Index, which tracks
developed-market stocks, declined 5.5% in the month after January
2016, when the Zika virus spread to several countries, but returned
2.9% over the course of six months. Morningstar analysts came to a
similar conclusion, finding that, among the companies they covered,
none suffered a long-term effect from the 2002-2003 SARS
outbreak.
Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com
(END) Dow Jones Newswires
January 28, 2020 16:45 ET (21:45 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.