Driven by sustained low inflation, the bond market has rebounded for decades, and this round of decline in yields is the latest milestone of this round of rebound. The yield on the 10-year Treasury has been hovering between 1.5% and 2% for months, but it has been sharply lowered by reports that the coronavirus is spreading globally. The Centers for Disease Control and prevention warned earlier this week that the threat to US residents is increasing.
As investors shifted from risky assets to bonds, the Dow Jones Industrial Average fell by more than 1000 points, or 10%, for several days, to its lowest level since October last year. The S & P 500 has lost about $1.7 trillion in value due to a two-day slump, according to the S & P Dow Jones Indexes. Share prices of banks, consumer goods companies and restaurants have fallen, highlighting investors widespread concern that falling consumer spending will affect profits.
Even the day before yesterday, the U.S. stock market opened higher, but quickly back up gains, after the U.S. Centers for Disease Control and prevention issued a warning, the stock market accelerated decline. Combined with the bond market, both indicators broke the record low set after the UK in July 2016, when the UK voted to withdraw from the EU. When bond prices rise, yields fall. Treasury bond yield is a key economic indicator, which usually rises when economic growth and inflation accelerate, and declines when the economy loses momentum. They also help to determine the borrowing costs of consumers, businesses, state and local governments.
Expectations for the Fed
Most analysts believe that in recent years, long-term structural factors such as slowing global economic growth, more moderate inflation and ultra-low interest rates set by major global central banks have depressed yields. The new coronavirus infection may disrupt the supply chain, inhibit global travel and may lead to a new round of monetary stimulus, thus aggravating the situation. Marie MaryAnnHurley, vice president of fixed income trading at Davidson Co (D.A.Davidson&Co.), said the extent of the decline in Treasury yields depends on the extent of the spread of the virus. I think there is a bottom, but Im not sure where it is. We are in an unknown field.
One of the factors that affect Treasury yields is the level of short-term interest rates set by the Federal Reserve. The other is inflation, which erodes the purchasing power of bond fixed payment. Currently, the Federal Reserves benchmark federal funds rate is set between 1.5% and 1.75%. A growing number of investors expect at least two more rate cuts later this year. Meanwhile, the Feds preferred inflation target is still below its annual target of 2%. On Sunday, G20 officials also warned that the coronavirus posed a serious threat to global economic growth.
Expectations for the Fed
One concern is that the yield on 10-year bonds is far lower than that on three-month bonds, a phenomenon known as the reverse yield curve, which usually precedes economic contraction. However, the yield of 10-year Treasury bonds is still higher than that of other short-term treasury bonds such as two-year Treasury bonds. As short-term US Treasuries are particularly sensitive to the outlook for monetary policy, this is a sign that investors believe the Fed will cut interest rates in a relatively short period of time and may help the economy.
Although Fed officials largely say they want to see more signs of economic collapse before taking action. Treasury yields have been hovering at historic lows for years, but stock indexes are still climbing. One reason is that low yields can help companies reduce their borrowing costs. The U.S. Treasury bonds are also deeply affected by the economic situation outside the United States. The bond yield of trillions of dollars in other parts of the world is negative, which leads to the decline of the U.S. Treasury bond yield. Over the years, bond yields have fluctuated. But shortly after the Fed raised key policy rates to 19% in June 1981 to curb soaring inflation, they have generally fallen.