By Sam Goldfarb
The yield on the benchmark 10-year U.S. Treasury note fell to an all-time low Tuesday as stocks swooned for a second straight day, driven by worries the coronavirus could seriously disrupt an already sluggish global economy.
The fall in yields marked the latest milestone in a decadeslong bond rally driven by persistently low inflation. After hovering between 1.5% and 2% for months, the 10-year yield was pushed sharply lower by reports the coronavirus was spreading outside China. The Centers for Disease Control and Prevention warned Tuesday of an increased threat to U.S. residents.
As investors fled riskier assets for bonds, the Dow Jones Industrial Average lost more than 3% Tuesday, and has notched a two-day decline of more than 1,900 points, or 6.6%, to close at its lowest level since October. The two-session rout has cut an estimated $1.7 trillion from the S&P 500, according to S&P Dow Jones Indices.
Shares of companies as varied as banks, consumer-goods companies and restaurants retreated, underscoring investors' broad fear of a pullback in consumer spending hurting profits. Stocks briefly opened higher in U.S. trading but quickly gave up those gains, and declines accelerated after the CDC warning.
The yield on the 10-year note fell as low as 1.310% on an intraday basis and settled at 1.328%, according to Tradeweb, compared with 1.377% Monday. Both of those marks beat record lows set in July 2016 after the U.K.'s vote to leave the European Union. Yields fall when bond prices rise.
Treasury yields are a key economic gauge, typically rising when growth and inflation are accelerating and sliding when the economy is losing steam. They also help determine borrowing costs for consumers, businesses, and state and local governments.
Most analysts agree that yields have been depressed in recent years by long-term structural factors, such as slow global growth, even more muted inflation, and ultralow interest rates set by the world's major central banks. New coronavirus infections have threatened to exacerbate those conditions by disrupting supply chains, suppressing global travel and potentially leading to a new round of monetary stimulus.
How far Treasury yields fall "depends on how much the virus spreads," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. "I think there's a floor, but I don't know quite where it is.We're in uncharted territory."
One factor that influences Treasury yields is the level of short-term interest rates set by the Federal Reserve. Another is inflation, which erodes the purchasing power of bonds' fixed payments.
As it stands, the Fed's benchmark federal-funds rate is set between 1.5% and 1.75%. An increasing number of investors expect at least two more interest-rate cuts later this year. Meanwhile, the Fed's preferred inflation gauge remains below its 2% annual target.
Until recently, investors have been comforted by forecasts that the economic damage from the coronavirus would be relatively short-lived, both around the world and in the U.S. On Friday, however, some of that confidence was dented when IHS Markit's measure of manufacturing and service-sector activity fell to its lowest level in more than six years. On Sunday, officials from the Group of 20 major economies also warned that the coronavirus posed a serious risk to global growth.Stocks fell Monday after largely shrugging off coronavirus concerns in previous weeks.
Investors are worried about "what global growth will look like even if we do get a medium-term resolution," said Michael Lorizio, a senior trader at Manulife Investment Management.
Looking beyond the record-low yields, analysts said the bond market has been sending mixed signals about the economy. One concern is that the 10-year yield has fallen well below that of the three-month Treasury bill, a phenomenon known as an inverted yield curve that often occurs before economic contractions.
Still, the 10-year yield remains above the yield of other short-term Treasurys such as the two-year note. Because short-term Treasurys are particularly sensitive to the outlook for monetary policy, that is a sign that investors are confident that the Fed will lower rates relatively soon and possibly help the economy -- though Fed officials have largely said they want to see more signs of economic disruption before acting.
Treasury yields have flirted with record lows for years, but stock indexes have still continued to climb to records. One reason is that low yields can be helpful to businesses by lowering their borrowing costs. Treasurys are also heavily influenced by economic conditions outside of the U.S., with yields pulled lower by the trillions of dollars worth of bonds elsewhere in the world that carry negative yields.
Yields have had their ups and downs over the years. But they have generally trended lower since shortly after the Fed raised its key policy rate above 19% in June 1981 in an attempt to tame soaring inflation. These days, many economists are concerned about the lack of inflation. But its absence has provided a base of support for government bonds that has persisted even when investors have grown more optimistic about the economy.
In recent years, there have been brief moments when investors thought inflation could rise materially higher, most notably after President Trump's election in November 2016, when many expected tax cuts and infrastructure spending to boost growth. But the 10-year yield has never climbed much higher than 3% and has spent much of the past five years hovering between 1.5% and 2.5%.
Economists have offered a variety of explanations for why growth and inflation have been sluggish in recent years. Those include the historic levels of debt held by governments and businesses, which some say has curtailed investment. Some also argue that technological advancements and global supply chains have held down the cost of producing goods.
Not all investors think that Treasurys will continue rallying. After more than a decade of growth, investors keep worrying that the U.S. economy is going to falter, but "every time this has happened, things have snapped back in the other direction," said Scott Kimball, a portfolio manager at Taplin, Canida & Habacht LLC.
Treasurys, he said, "feel overcooked to us."
Caitlin Ostroff and Akane Otani contributed to this article.
Write to Sam Goldfarb at email@example.com
(END) Dow Jones Newswires
February 25, 2020 18:52 ET (23:52 GMT)
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