As a markets columnist, I don’t like writing about the spreading coronavirus. First and foremost, the news just gets worse by the day in terms of human lives lost, and I’m no epidemiologist. On top of that, the outbreak has also led to weeks of whipsawing headlines. One day, U.S. stocks will tumble as virus concerns mount. Days later, equities will reach records as virus fears ease. And on and on it goes.
The last time I checked in was Jan. 27. On that day, the S&P 500 Index dropped by the most since October and benchmark 10-year Treasury yields fell almost 8 basis points to 1.6%. At the time, a handful of sell-side strategists said the move couldn’t possibly last. I argued that investors may hate buying Treasuries at a 1.6% yield, but it might not be such a bad move, given how 2020 has started.
Fast-forward to today. The S&P 500 Index plunged more than 3% at one point. The 10-year U.S. yield tumbled to 1.357%, just a few basis points away from the all-time low of 1.318% set in July 2016. The 30-year yield has already set records, reaching as low as 1.81%. Traders are pricing in more than two quarter-point interest-rate cuts by the Federal Reserve in 2020 after recent data showed the first contraction in U.S. business activity since 2013, raising the prospect that even America can’t shake off disruptions caused by the coronavirus. The yield curve is the most inverted in months.
At this point, the question is no longer “why are U.S. yields this low?” but rather “how low can yields go?” My Bloomberg Opinion colleague Marcus Ashworth addressed this from his perch on the other side of the Atlantic, arguing that the U.S. could be headed toward zeroed-out yields like Europe and Japan if the coronavirus gets much worse.
Make no mistake: The news about the coronavirus is bad. It has killed more than 2,600 people so far and infected about 80,000. Italy’s financial hub, Milan—about 5,400 miles from the epicenter of the virus outbreak in Wuhan, China—is in a virtual lockdown, with the region’s schools, universities and museums closed and sporting events canceled. If that can happen in Milan, where’s next? It paints a harrowing portrait of global economic growth if large cities go silent.
But traders may want to resist jumping ahead so fast. For one, the 10-year Treasury yield isn’t even yet at a record low, let alone hurtling toward zero. The 1.318% level will surely have stiff resistance and require more than just fear and haven demand to breach. Still, it could very well happen, at which point strategists at BMO Capital Markets say to “look out below.”
More important, there are just far too many unknowns to invest with any sort of conviction. Tomas Philipson, the acting director of the Council of Economic Advisers, called the coronavirus a “real threat” but said it’s too soon to know for sure how seriously it will affect the U.S. economy. The International Monetary Fund cut 0.1 percentage points from its global growth forecast but is also looking at more “dire” scenarios. That’s hardly a clear road map.