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.
“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 coordinated statement that they were ready to act, which also failed to alleviate concern in markets.
“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.
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 by the central bank -- possibly later this month. The Fed has a regularly scheduled meeting on March 17-18.
The rate on benchmark 10-year notes sank as much as 25.9 basis points to 0.9043% on Tuesday, though it rebounded to finish the day around 1%. 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.
The Fed chief acknowledged the central bank doesn’t have all the answers, adding that it would take a multi-faceted response from governments, health-care professionals, central bankers and others to stem the human and economic damage from the virus.
“Powell didn’t sound very upbeat, and is part of what is spooking markets,” said Roberto Perli, a partner at Cornerstone Macro LLC and former Fed economist. “The driver of yields is also what the market expects the Fed to do, and they keep pulling expectations for the funds rate further down.”