By Sunny Oh
The U.S. 30-year Treasury bond yield dropped to an all-time low on Friday, sparking worries among investors who wonder what it’s saying about the economy’s future prospects.
Analysts say the slump in the long bond’s yield this week reflects a confluence of factors including easy Federal Reserve monetary policy, concerns about the COVID-19 epidemic’s impact on economic growth, and an absence of inflationary pressures.
Historically, a slump in long-term yields can indicate fears that growth will start to disappoint and inflation will fall which may make the real return on bonds more attractive.
On Friday the 30-year U.S. Treasury bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -0.40% fell 5.2 basis points to 1.92% based on Tradeweb data to an all-time low of 1.89%. The 10-year note yield also tumbled below the key level of 1.50%, last trading at 1.475%.
Here’s a few reasons why the bond-market made history on Friday.
Heading into Friday investors were already on the watch for signs of the economy succumbing to the coronavirus epidemic amid fears that it would disrupt global supply chains and weigh on growth estimates for China which now has the second largest economy in the world.
So when IHS Markit released its weaker-than-expected U.S. February manufacturing and service sector purchasing managers surveys, the data sent panic among investors who received one of the first confirmations that the coronavirus impact could be more painful than thought.
With the exception of the U.S. government-shutdown of 2013, US business activity contracted for the first time since the 2008 global financial crisis in February, according to IHS Markit’s flash PMI data. Adjusted for seasonal factors, the Composite PMI Output Index (covering both manufacturing and services) slumped to 49.6 in February, down from 53.3 in the opening month of 2020. Weakness was primarily seen in the service sector, where the first drop in activity for four years was reported, but manufacturing production also ground almost to a halt due to a near-stalling of orders.
“Compared with official data, statistical analysis indicates that the survey indices are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February”, Chris Williamson, Chief Business Economist at IHS Markit, said.
The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.08% index and Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.22% deepened their losses following the PMI report as both benchmarks retreated from their respective record closes set earlier this week.