Treasury Yields Hurtle Toward Zero as Bets on Fed Cuts Mount

Treasury yields plummeted to record lows Friday as concern about the global economic and financial impact of the coronavirus spurred demand for havens and traders amped up bets on further central bank easing this month.

“What we are seeing is symptomatic of not enough positive yielding, defensive assets within global fixed income,” said John Taylor, a money manager at AllianceBernstein. “Central banks are doing everything they can to provide stimulus, which can add fuel to the flames of the bond rally.”

The moves came as stocks around the world plunged and futures pointed to another day of losses in U.S. equities. The number ofcoronavirus cases globally approached 100,000, as more infections were reported in the U.S., Germany and South Korea. Singapore warned of a global pandemic and Britain’s chief scientific adviser said a vaccine could take as long as 18 months to develop.

The five-year Treasury yield breached its 2012 low, dropping to a record low 0.5339%. The yield on 10-year debt — which has fallen by more than half in just over two weeks — dropped as much as 22 basis points to an unprecedented 0.6932%, before bouncing to around 0.77% as of 7:14 a.m. in New York. The 30-year rate, meanwhile, plunged as much as 27 basis points Friday to 1.2742%, also a record low. Other havens also rallied, with the yen at one point climbing more than 1% to around 105 per dollar, while bund yields became even more deeply negative.

Money markets showed somesigns of stress with the so-called FRA/OIS spread — seen by many as a proxy for banking sector risk — widening for a fourth straight day. It was around 44 basis points on Friday, up about 20 basis points from Monday’s level.

“We are staring at the abyss of a credit crunch,” said Kaspar Hense, a portfolio manager at BlueBay Asset Management, noting in particular the widening of FRA/OIS in the U.S. money market.

The Federal Reserve earlier this week joined central bank peers in providing support to the economy and markets. It slashed its target by half a point at an emergency meeting to a range of 1.00% to 1.25%. But traders are betting they will have to do much more. Fed funds futures contracts now indicate that the U.S. central bank benchmark will drop to less than a quarter of a percentage point in the second half of this year. And more than half a point of additional easing is priced in for this month alone.

“The market’s focus is squarely on the growing likelihood of the Fed once again hitting the zero lower bound on short-term interest rates and restarting quantitative easing,” said Chris Jeffery, head of rates and inflation at Legal & General Investment Management. “With the number of coronavirus cases spiraling higher every day, it’s a brave investor who stands in front of that trend.”

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Sidelined bank cash may also be adding fuel to the recent surge in the Treasury market, which this week alone has seen two intra-day drops of more than 20 basis points for the 10-year yield. Around $1.8 trillion, or about 10%, of U.S. commercial banks’ assets is in cash that hasn’t been lent out or invested, according to Federal Reserve data and FHN Financial Chief Economist Chris Low estimated that pile could more than double in the event of a recession brought on by the spreading coronavirus.

“I’m hearing about mountains of cash looking for a home,” said Mary Ann Hurley, a Seattle-based vice president of fixed-income trading at investment firm D.A. Davidson & Co.

Outside the U.S., government debt markets are also being shaken. China’s 10-year rates fell to the lowest since the country was battling deflation in 2002. German yields closed in on record lows and those on short-dated U.K. debt neared 0% as the market braces for more stimulus from central banks.

“I can make some exploding noises with my mouth, which about sums it up,” said Ranko Berich, head of market analysis at Monex Europe Ltd.

— With assistance by Vivien Lou Chen

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