By Mark DeCambre, MarketWatch
The old saw used to be that when the U.S. sneezes, the rest of the world catches a cold.
Now, a more apropos adage for market bears may be that when an outbreak of coronavirus grinds the world’s second-largest economy to a halt, the rest of the world catches a recession.
Indeed, recession fears resurfaced on Wall Street last week, even as equity markets stood not far from all-time highs, amid volatile trade that whipsawed mostly on jitters that supply chains and economies could suffer from the spread of the infectious illness that originated in Wuhan, China, known as COVID-19.
“The [coronavirus spread] definitely injects an element of uncertainty into markets for the near term and for the longer term as well,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Stocks sold off sharply Monday to add to last week’s decline, with the Dow Jones Industrial /zigman2/quotes/210598065/realtime DJIA -1.51% down 779 points, or 2.7%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.08% dropped 2.6% and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -0.86% shed 2.9%.
Analysts at BofA Global Research said the probabilities of a recession have increased and that is reflected in the action in yields for the 10-year Treasury note and the 30-year Treasury bond, which plunged Friday to its lowest rate on record. Investors will flee to the presumed safety of U.S. government bonds, driving yields lower, with the hope of avoiding losses that can derail riskier assets in a selloff.
The 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.33% fell a further 9 basis points Monday into uncharted territory at 1.826%. The 10-year note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.51% , which last week tumbled below the key level of 1.5%, wa down 10 basis points at 1.371%. Bond yields move in the opposite direction of prices.
BofA said a move for the 10-year below 1.4% could represent a tipping point for the market, one that raises the probability for a recession, particularly if the Federal Reserve continues to hold benchmark rates at the current 1.50-1.75% range.
Here’s how BofA’s analysts put it (see attached chart): “Indeed, breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher…”
Source: BofA Global Research
Part of the worry for fixed-income folks is the flattening of the yield curve, which traces yields across maturities from short-dated to longer term. Once flat, there is a greater potential for the curve to invert, leaving short-end debt paying out more than longer-dated obligations.
Inversions are seen as a reliable indicator of an economic downturn or recession. And one key measure of that, the spread between the 2-year and 10-year T-note yield, stood at less than 10 basis points on Monday.
Already, the 3-month T-bill yield /zigman2/quotes/211347046/realtime BX:TMUBMUSD03M +5.15% at 1.505% trades above the 10-year rate.