Investors fled to bonds after news of the coronavirus spreading rocked the stock market, sending the 10-year Treasury note to its lowest level since July 2016.
The 10-year yield plummeted 10 points to 1.36% as investors worry what the coronavirus outbreak could mean for the global economy. The 30-year Treasury note also hit a record-low 1.82%.
Cases of the coronavirus spiked in Iran, Italy and South Korea, increasing concern after the vast majority of previous cases were contained to China. South Korea has now confirmed over 760 cases and seven deaths, and cases in Italy spiked over 150 with three confirmed deaths.
“Global pandemic concerns catalyzed an intuitive rotation out of risk assets and into safe havens to start the week,” BMO’s Ian Lyngen said in a Monday note, according to CNBC. “The most important number in the US Treasury market has become … the all-time record low yield mark set in the aftermath of Brexit. If that level is breached, look out below.”
This is only the latest drop in yields since the beginning of 2020. The 10-year and 30-year notes have given up almost 60 basis points since Jan. 1, driven by both the coronavirus and a lack of inflation.
Because of this, investors are increasing their odds of an interest rate cut by the Federal Reserve. The Fed has already stated it doesn’t feel another move on interest rates is necessary without a significant economic event, but CME’s FedWatch tool now shows a 23.2% chance of a cut during the central bank’s meeting on March 18. Jump ahead to the April 29 meeting and the odds of a 25-basis-point cut to a range of 1.25% to 1.5% jumps to 45%.
As yields continue to drop, the bond market has been continuously flashing a recession indicator known as an inverted yield curve. This happens when a long-term bond’s yield drops below that of a short-term counterpart.
The 10-year yield dropped below the 2-year last summer, causing some investors to panic about the chances of a recession. Every recession in the last 50 years has been preceded by this market phenomenon.
Those two curves have since corrected, but the 10-year has been consistently below the 3-month Treasury lately, which is another curve that is closely monitored by the Fed.