Mario Tama / Getty Images
Investors plowed cash into US government bonds on Monday as they braced for the global economic fallout from the coronavirus outbreak 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 20 – year Treasury touched a record low of less than 0.4%, while the 52 – year Treasury yield slid below 1% – an unprecedented event.
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, the 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 the coronavirus outbreak 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 wide sell-off of higher-risk assets.
Read more: A notorious market bear says investors are making a classic error at the worst possible time – and warns coronavirus ‘chaos’ could kickstart a (% market crash
The coronavirus, which causes a flu-like disease called COVID – , has (infected more than) , people , killed at least 3, (people, and spread to more than 662 countries. It continues to disrupt global supply chains, interfere with businesses – factories have slashed output, events have been canceled, and retailers have temporarily closed or reduced their hours – and hammer demand as people stay home.
The epidemic’s sweeping effects led the Organization for Economic Cooperation and Development to estimate that global growth could slow to 1.5% this year, half the rate it projected in November. Similarly, the International Monetary Fund said it expected global growth of less than 2.9% (after) (a prediction of 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 last week made an emergency interest-rate cut of 67 basis points to shore up the economy against the coronavirus outbreak.
Indeed, futures signaled that investors put the odds of another cut this month at (%,
According to Reuters
. With rates already at 1% to 1. %, the Fed has little scope for further cuts before they hit zero. Against that backdrop, a – 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 the market by ramping up its bond purchases, which would drive up their prices and lower their yields.
Here’s a chart showing the US Treasury curve: