Investors snapped up U.S. Treasurys, pushing yields down sharply, as traders noted the growing number of COVID-19 cases outside of China’s borders, raising concerns that a broader contagion could weigh on regional Asian economies.
What’s driving Treasurys?
The 10-year Treasury note yield TMUBMUSD10Y, -2.93% fell 4.5 basis points to 1.524%, while the 2-year note rate TMUBMUSD02Y, -2.87% was down 3.1 basis points to 1.393%. The 30-year bond yield TMUBMUSD30Y, -2.36% slipped 4.4 basis points to 1.971%, only 2 basis points away from its all-time low of 1.95% set on last September.
The spread between the 3-month bill TMUBMUSD03M, -0.49% and the 10-year note yield turned negative again, inverting the so-called yield curve. An inversion along this measure is viewed as a prelude to a recession, but some analysts have argued that it’s unclear how long it takes after the inversion before an economic downturn.
What’s driving Treasurys?
Investors may have been rattled by the growing number of coronavirus cases outside of China, after the number of new cases in South Korea jumped to more than a hundred on Thursday, according to local health officials. And two passengers from a cruise ship quarantined in Japan died due to the coronavirus.
Those concerns helped to draw inflows into government paper at the expense of risk assets. Market watchers cautioned, however, that there was no clear-cut reason for the sharpness of Thursday’s equity selloff, which saw U.S. stock benchmarks pull back from all-time highs.
There are at least 75,000 confirmed cases of COVID-19 and more than 2,100 deaths, primarily in mainland China, according to the latest figures from the World Health Organization.
Data showed that China was encouraging the flow of credit before the coronavirus froze industrial activity in the second largest economy in the world as the People’s Bank of China reported that Chinese loan growth had jumped by 12.1% year-over-year in January. Recently, the Chinese central bank has created a new lending program offering cheap credit to corporations whose operations have been disrupted by the coronavirus.
China’s central bank cut its one-year benchmark lending rate by 10 basis points to 4.05% on Thursday.
In economic data, U.S. initial jobless claims increased by 4,000 to 210,000. Meanwhile the Philadelphia Fed manufacturing index rose to 36.7 in February, its highest reading in three years. The Conference Board’s January reading of its U.S. Leading Economic Indicator index rose 0.8%.
Federal Reserve Vice Chairman Richard Clarida said the U.S. economic outlook still looked good. He also said the central bank would monitor the coronavirus, but that it still remained too early to assess the virus’s overall impact on growth.
Read: Goldman Sachs warns of imminent risk for stocks due to complacency on coronavirus
What did market participants’ say?
“We’re still trying to assess the magnitude and the longevity of the coronavirus,” said Maura Murphy, a portfolio manager at Loomis Sayles, in an interview.
Of the lack of inflation expectations priced into long-dated Treasurys, she added that the commodity weakness driven by global growth concerns have offset any worries about supply shortages from slowing production in China.