There’s no bottom in sight for Treasury yields after the Federal Reserve’s aggressive rate cut failed to quell fears that the coronavirus is wrecking the global economy.
Before Tuesday, the 10-year note had never yielded less than 1%. Once that historic level was breached, less than 30 minutes later the rate was threatening 0.90% -- or half the amount it yielded at the end of 2019. Such is the new normal in the world’s benchmark bond market, where anxiety has taken hold to a degree last seen during the 2008 financial crisis.
The slide in bond yields persisted across Europe on Wednesday with 10-year yields in the U.K. dropping to a record low on bets the Bank of England will follow the Federal Reserve.
“There is some sense that the Fed is kind of shooting their bazooka off and might know something else, that this pandemic might get substantially worse in the U.S.,” said Donald Ellenberger, a senior portfolio manager at Federated Investors Inc. “This is a market that is simply being driven by fear.”
The Fed cut its main policy rate by a half-point in an emergency inter-meeting move on Tuesday. It came barely two hours after Group-of-Seven finance chiefs said in a statement that they were ready to act, which also failed to alleviate concern in markets.
Following the Fed’s emergency decision, a swoon in stock prices and sanguine comments from Chairman Jerome Powell emboldened traders to bet on the risk of a major economic slowdown that triggers even more easing -- possibly later this month. The Fed has a scheduled meeting on March 17-18.
“I would expect Fed fund rates to be at or close to zero six months from now as a base case,” said Michael Riddell, a portfolio manager at Allianz Global Investors in London. “I think the virus is going to spread in coming months and that will cause substantial economic damage.”
The yield on benchmark U.S. 10-year notes sank as much as 25.9 basis points to 0.9043% on Tuesday. It was at 0.95% as of 9:50 a.m. in London on Wednesday. The yield could slide further, said Riddell, whose strategic bond fund has outperformed 98% of its peers in the past month.
In a sign of deep concern about the growth outlook, the yield on 30-year inflation-linked Treasuries fell below zero for the first time. Swap spreads tightened, possibly a sign that mortgage investors were forced to hedge their portfolios once the 10-year breached 1%, exacerbating the move in Treasuries. In the U.K., 10-year yields fell to a record low of 0.335%.
“The market was expecting a more coordinated and decisive response and not just one from the Fed,” said Solita Marcelli, deputy chief investment officer for the Americas at UBS Global Wealth Management. People “are overlooking that the Fed is being proactive and are focused on whether the Fed sees the impact on the economy from the virus as being worse” than most expect now, she added.