By Sam Goldfarb, Caitlin Ostroff and Anna Isaac 

This week's rally in U.S. government bonds picked up new momentum Friday, reflecting investors' intense demand for safer assets and escalating bets that the Federal Reserve will move quickly and aggressively to cut interest rates.

The yield on the 10-year note fell to as low as 1.150%, a new record intraday low, from 1.296% Thursday, according to Tradeweb.

Falling even more sharply, the yield on the two-year note was on track for its largest one-day decline since 2009, reaching as low as 0.897% from 1.099% Thursday. Yields fall when bond prices rise.

Analysts said the steep decline of the two-year yield, which is particularly sensitive to changes in monetary policy, reflected the growing confidence among traders that the Fed will cut interest rates.

Just a week ago, federal-funds futures, which traders use to bet on the path of central-bank policy, showed an 11% chance that the Fed would lower its key policy rate by 0.25 percentage point at its March 17-18 meeting, according to CME Group data. Early Friday, traders saw a 48% chance of a 0.25 percentage-point cut and a 52% chance of a 0.5 percentage-point cut.

Some investors said Friday that the Fed could even cut rates before its next meeting to stem turmoil in the markets, as stocks threatened to post their biggest weekly losses since 2008 due to fears that the coronavirus will significantly disrupt the global economy.

Though the next meeting is just weeks away, "I'm not sure they can go that long," said Bill Zox, chief investment officer of fixed income at Diamond Hill Capital Management.

Doug Ramsey, chief investment officer at the Leuthold Group, also said the Fed will likely cut interest rates by 0.25 percentage point before the March meeting because of its sensitivity to market sentiment.

Investors' conviction that the Fed will cut rates stand in contrast to recent statements from Fed officials.

Largely echoing other officials who have made public remarks this week, Federal Reserve Bank of St. Louis President James Bullard said Friday that the coronavirus situation could cause the central bank to lower rates, but so far, he doesn't think reducing the cost of short-term borrowing is needed.

Mr. Bullard, who isn't a voting member of the Federal Open Market Committee this year, said falling Treasury yields would also likely benefit the U.S. economy on its own.

Some of the decline in Treasury yields was a response to uncertainty abroad in Europe and Asia, where the virus has had a more direct impact -- disrupting travel and commerce. European government bond yields dipped across the board Friday, with the 10-year German bund trading at minus 0.613%, its lowest since October and below the short-term interest rates set by the European Central Bank of minus 0.5%.

Investors unwilling to hold negative-yielding European debt often move into relatively higher-yielding U.S. bonds, causing yields to fall there as well.

The rally has dropped longer-term yields below shorter-term ones, a phenomenon known as an inverted yield curve that is often seen as a harbinger for a coming recession.

Some economists have argued, however, that U.S. Treasurys don't offer as clear a signal of recessions as in past years due to more globalized markets and post-2008 financial-crisis monetary-policy measures such as quantitative easing, in which central banks have bought government bonds.

"For a recession in the U.S. you would need to see consumer confidence fall lower," said Vivek Bommi, senior portfolio manager, noninvestment-grade credit at Neuberger Berman in London. "You would need to derail the consumer, and that's the big question that everyone's grappling with."

The decline in U.S. Treasury yields had been more pronounced than in European government bonds. This was because the Fed has greater headroom to cut interest rates relative to the European Central Bank where rates are already negative.

"The Fed is capable of doing much more -- it has more room away from the lower bound of monetary policy," Mr. Jones said.

The benchmark 10-year German bund is still more than 0.1 percentage point from its all-time low, touched last year, notes Eric Brard, global head of fixed income at Amundi Asset Management in Paris.

"From that perspective there is room for further decline. We need to assess how long and deep and strong the shock might be going forward," he said.

In a sign of the disquiet the coronavirus is causing in financial markets, Italian and Greek yields rose, as investors feared the impact on two of Europe's weakest economies. The yield on the Greek 10-year bond rose to 1.422% Friday after hitting a record closing low of 0.950% two weeks ago. Expectations of a long-awaited economic rebound in Greece have now been put on hold because of the virus outbreak.

"Let's just say the hunt for yield is currently on pause. People are moving toward safety. It's not something we haven't seen before," said Dimitris Dalipis, head of fixed income at Alpha Trust Investments, based in Athens. "It's like a textbook correction."

--Sebastian Pellejero contributed to this article.

Write to Sam Goldfarb at sam.goldfarb@wsj.com, Caitlin Ostroff at caitlin.ostroff@wsj.com and Anna Isaac at anna.isaac@wsj.com

(END) Dow Jones Newswires

February 28, 2020 12:21 ET (17:21 GMT)

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