By Sunny Oh
U.S. Treasury yields fell on Thursday as traders priced in expectations for the Federal Reserve to step in and lower interest rates to cushion the potential economic blow from the COVID-19 epidemic.
What are Treasurys doing?
The 2-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -3.64% , which tracks expectations for monetary policy, slipped 4.6 basis points to 1.099%, its lowest close since Nov. 2016.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.27% fell 1.4 basis points to 1.296%, while the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -2.46% edged 1.4 basis points lower to 1.782%, with both long-dated maturities ending at records. Bond prices move in the opposite direction of yields.
What’s driving Treasurys?
An official from the Food and Drug Administration said COVID-19 was on its way to becoming a pandemic, and a confirmed case of the coronavirus in California that had no history of travel have raised worries that the virus could be spreading despite the travel restrictions imposed on China. Also supporting bullish sentiment in Treasurys, Microsoft warned that the supply chain disruptions from the virus would have an impact on sales.
The S&P 500 /zigman2/quotes/210599714/realtime SPX -1.51% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.69% both entered correction territory on Thursday, defined as a 10% drop from an intraday record.
The potential for a spillover into the U.S. has heightened expectations for the Federal Reserve to ease monetary policy, on top of the three interest rate cuts the central bank carried out last year.
Traders wagering on the direction of the Fed’s benchmark interest rate in the fed fund futures market see close to a 60% chance of a quarter percentage point rate cut in March, according to the CME Group.
At the same time, analysts warned the Fed was unlikely to cut in a month’s time, especially if the impact turned out to be transitory. Chicago Fed President Charles Evans said it was premature for the central bank to move on the virus concerns.
Economic data was overshadowed by the coronavirus. A revision of U.S. first-quarter gross domestic product came in at 2.1%, in line with analyst forecasts. Durable goods decreased by 0.2% last month, and pending home sales jumped 5.2% in January.
What did market participants’ say?
“Right now, the market is trading purely off coronavirus headlines. There’s just this tremendous amount of uncertainty whether this goes away by the end of March, or doesn’t go away at all. There’s a wide interpretation of who is right and who is wrong,” Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, told MarketWatch.
“Fed rate cuts aren’t going to solve the coronavirus. Interests are so low already, the Fed has only six cuts until it gets to zero. They have to be cautious,” said Justin Lederer, an interest-rate trader at Cantor Fitzgerald, said in an interview.