Bond Report: 2-year Treasury yield sees biggest weekly drop since 9/11 as interest rate cut bets gain ground

Bond Report: 2-year Treasury yield sees biggest weekly drop since 9/11 as interest rate cut bets gain ground

28 Feb    Finance News

U.S. Treasury yields fell for a seventh straight session on Friday, extending a relentless slide that has taken government bond yields to record lows amid expectations that the COVID-19 epidemic will curtail global economic activity, and force the Federal Reserve into action.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -7.57%  was down 17 basis points to 1.127%, its biggest daily drop since November 2011. The benchmark maturity fell 34.3 basis points this week, its biggest such drop since December 2018. The 30-year bond yield TMUBMUSD30Y, -6.04% fell 12.4 basis points to 1.658%, adding to a week long decline of 25.9 basis points.

In a sign of growing expectations for Federal Reserve interest rate cuts this year, the 2-year note yield TMUBMUSD02Y, -18.56%   tumbled 22.1 basis points to 0.878%, marking its biggest daily drop since October 2008. The short-dated maturity also fell 47 basis points this week, its biggest such drop since the week of the September 11 attacks in 2001.

For the month, the 10-year note dropped 39.4 basis points, the 2-year note fell 45.1 basis points and the 30-year bond declined 35.4 basis points.

What are Treasurys doing?

Traders are now betting on the Fed to ease monetary policy even as economists say lower interest rates are ill-suited to soothing the supply shock resulting from the coronavirus epidemic. The fed fund futures market is now pricing in a 100% chance of at least one quarter percentage point rate cut at the Fed’s March 18 meeting

Dallas Fed President Robert Kaplan said he would be ready to make a decision at the March meeting, while St. Louis Fed President James Bullard said investors could be overestimating the economic damage from the coronavirus.

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Fed Chairman Jerome Powell issued a statement on Friday that the economy’s foundations was strong, but that the central bank was ready to “act as appropriate” to support the economy. Analysts said the statement could point to potential Fed action in coming months.

Powell’s comments come as the week long selloff in global stock-markets sent investors scurrying into government bonds as the rising number of COVID-19 cases outside of China and its neighboring countries have added to concern the coronavirus epidemic will turn into a pandemic. With the global economy’s brief respite from international trade policy uncertainty terminated by the epidemic, analysts are reviewing forecasts for global economic growth.

The S&P 500 SPX, -0.82% index  and the Dow Jones Industrial Average DJIA, -1.39%   extended their losses, after both benchmarks recorded a correction this week. A correction is defined as a 10% drop from an intraday peak.

See: Here are 5 reasons the stock market is having its worst decline since 2008, and only one of them is the coronavirus

Read: Major bank economist says the coronavirus market reaction ‘boggles the mind’

BofA Global Research said $20 billion has departed from global equity funds this week, while bond funds attracted $12.9 billion over the same period.

See: Bets on Interest Rate Cuts Escalate

What did market participants’ say?

“Up until this point, guidance from the Fed had suggested that they were still firmly in “wait-and-see” mode, preferring to wait until they had economic data in hand that showed the coronavirus was having a negative impact on the US economy. [Powell’s] statement shows a significant dovish pivot,” wrote Thomas Simons, senior money market economist at Jefferies.

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“If inflation expectations remain this low during the spring, the Fed has to consider the implications for monetary policy beyond the epidemic and investors have to consider extended low rates,” said Jim Vogel, an interest-rate strategist for FHN Financial, in a note.

Inflation expectations over the next decade based on Treasury inflation-protected securities stood at 1.41% on Friday, a sharp drop from 1.80% in Jan. 2, according to Tradeweb.

What else is on investors’ radar?

Economic data highlighted the health of consumers, but were overshadowed by the coronavirus concerns. The U.S. trade deficit in goods narrowed to $65.5 billion in January. Personal income rose 0.6% last month, while consumer spending increased by 0.2%.

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