By Sam Goldfarb and Caitlin Ostroff 

The yield on the 10-year U.S. Treasury note fell close to an all-time low Monday after a jump in the number of coronavirus cases outside China stoked fears about a slowdown in global economic growth.

In recent trading, the yield on the benchmark 10-year note was 1.372%, according to Tradeweb, compared with 1.470% Friday.

That was near its all-time intraday low of 1.325% and its record closing low of 1.364% -- both set in July 2016, when investors piled into the government bonds after the U.K. voted to leave the European Union.

Yields, which fall when bond prices rise, tumbled Monday as worries mounted that the coronavirus epidemic could turn into a global pandemic, with countries as disparate as Italy and South Korea reporting a surge in cases.

Concerns that the coronavirus could dampen global growth and cause the Federal Reserve to lower interest rates have helped pull down Treasury yields since late January. But yields took a sharp turn lower late last week, as previously resilient stock markets also showed signs of buckling, sending investors to the safety of government debt.

"We're not getting a lot of good answers about how [the coronavirus] is spreading and why, so finally it's starting to see a significant market impact," said Larry Milstein, head of government and agency bond trading at R.W. Pressprich & Co.

Investors often buy Treasurys during times of political or economic uncertainty because they offer steady interest payments with essentially no risk of default. The prospect of lower rates set by the Fed can also boost Treasurys by making their yields look more attractive by comparison.

Federal-funds futures -- which traders use to bet on the path of central-bank policy -- showed Monday that investors think there is a 74% chance that the Fed cuts interest rates at least twice this year, according to CME Group data. That was up from 63% Friday and 46% a week ago.

The sharp drop in Treasury yields is notable because investors view the 10-year yield in particular as a key barometer for the economy. It typically rises when growth and inflation are accelerating and slide when the economy is losing steam. It also plays a critical economic function, helping determine borrowing costs for consumers, businesses and state and local governments.

Even before the coronavirus first appeared in China, Treasury yields were hovering near historic lows largely due to long-term structural factors. Among those is persistently muted inflation, which has diminished one of the major threats to longer-term government. Negative interest-rate policies in Japan and Europe have also dragged down yields across the developed world.

Underscoring the concerns about the economic outlook, the yield on the 10-year note dropped further below that of the three-month bill on Monday.

Investors closely watch the dispersion of Treasury yields because recessions have often followed times when long-term yields have dropped below short-term yields, a phenomenon known as an inverted yield curve. An inversion of the 10-year and three-month yields is seen as a particularly reliable signal of a coming economic contraction.

Yields on European government bonds also fell Monday

The yield on 10-year German bunds fell as low as minus 0.498%, from minus 0.440% Friday, according to Tradeweb. The yield on 10-year U.K. gilts dropped to as low as 0.503% Monday, from 0.559% Friday.

Fixed-income investors were watching for the yield on the German bund to fall below minus 0.5%, because it is the level of the European Central Bank's key deposit rate. A shift below this rate might spur fresh action from the central bank, said Luca Cazzulani, senior fixed income strategist at UniCredit.

Italian and Greek government bonds were notable exceptions to the trend, with the yield on the Italian 10-year bond temporarily climbing back above 1%. It ended Friday at 0.900% and is currently trading at 0.940%. Greek 10-year-bonds also rose back above 1%, from 0.966% Friday.

The rise in Italian and Greek bond yields was a result of investors fearing that further spread of the virus could raise recession risks in the two countries, which both have high debt burdens, said Nick Wall, a portfolio manager at Merian Global Investors.

"If there's a broader economic downturn then no one's going to be immune, " he said.

Write to Sam Goldfarb at sam.goldfarb@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

February 24, 2020 10:36 ET (15:36 GMT)

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