By Caitlin Ostroff, Anna Isaac and Sam Goldfarb
This week's rally in U.S. government bonds picked up new
momentum Friday, reflecting investors' intense demand for safer
assets and escalating bets that the Federal Reserve will move
quickly and aggressively to cut interest rates.
The yield on the 10-year note settled at 1.127%, according to
Tradeweb, breaking the previous record-low close of 1.296% set a
day earlier.
Falling even more sharply, the yield on the two-year note logged
its largest one-day decline since Oct. 2008 to finish at 0.878%,
compared with 1.099% Thursday.
Yields fall when bond prices rise.
Analysts said the steep decline of the two-year yield, which is
particularly sensitive to changes in monetary policy, reflected
growing confidence among traders that the Fed will cut interest
rates to stem market turmoil caused by the coronavirus.
Fed Chairman Jerome Powell said in a statement Friday afternoon
that the "coronavirus poses evolving risks to economic activity"
and that the central bank would "act as appropriate to support the
economy."
Just a week ago, federal-funds futures, which traders use to bet
on the path of central-bank policy, showed an 89% chance that the
Fed would keep interest rates unchanged at its March 17-18 meeting,
according to CME Group data. Shortly after Mr. Powell's statement,
traders saw a 4% chance of a 0.25 percentage-point cut and a 96%
chance of a 0.5 percentage-point cut.
Earlier in the day, some investors had speculated that the Fed
could even cut rates before its next meeting.
Though the next meeting is just weeks away, "I'm not sure they
can go that long," said Bill Zox, chief investment officer of fixed
income at Diamond Hill Capital Management.
Doug Ramsey, chief investment officer at the Leuthold Group,
also said the Fed will likely cut interest rates by 0.25 percentage
point before the March meeting because of its sensitivity to market
sentiment.
Some of the decline in Treasury yields was a response to
uncertainty abroad in Europe and Asia, where the virus has had a
more direct impact -- disrupting travel and commerce. European
government bond yields dipped across the board Friday, with the
10-year German bund falling as low as minus 0.624% -- below the
short-term interest rates set by the European Central Bank of minus
0.5%.
Investors unwilling to hold negative-yielding European debt
often move into relatively higher-yielding U.S. bonds, causing
yields to fall there as well.
The rally has dropped longer-term yields below shorter-term
ones, a phenomenon known as an inverted yield curve that is often
seen as a harbinger for a coming recession.
Some economists have argued, however, that U.S. Treasurys don't
offer as clear a signal of recessions as in past years due to more
globalized markets and post-2008 financial-crisis monetary-policy
measures such as quantitative easing, in which central banks have
bought government bonds.
"For a recession in the U.S. you would need to see consumer
confidence fall lower," said Vivek Bommi, senior portfolio manager,
noninvestment-grade credit at Neuberger Berman in London. "You
would need to derail the consumer, and that's the big question that
everyone's grappling with."
The decline in U.S. Treasury yields had been more pronounced
than in European government bonds. This was because the Fed has
greater headroom to cut interest rates relative to the European
Central Bank where rates are already negative.
"The Fed is capable of doing much more -- it has more room away
from the lower bound of monetary policy," Mr. Jones said.
The benchmark 10-year German bund is still more than 0.1
percentage point from its all-time low, touched last year, notes
Eric Brard, global head of fixed income at Amundi Asset Management
in Paris.
"From that perspective there is room for further decline. We
need to assess how long and deep and strong the shock might be
going forward," he said.
In a sign of the disquiet the coronavirus is causing in
financial markets, Italian and Greek yields rose, as investors
feared the impact on two of Europe's weakest economies. The yield
on the Greek 10-year bond rose to 1.322% Friday after hitting a
record closing low of 0.950% two weeks ago. Expectations of a
long-awaited economic rebound in Greece have now been put on hold
because of the virus outbreak.
"Let's just say the hunt for yield is currently on pause. People
are moving toward safety. It's not something we haven't seen
before," said Dimitris Dalipis, head of fixed income at Alpha Trust
Investments, based in Athens. "It's like a textbook
correction."
--Sebastian Pellejero contributed to this article.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com, Anna Isaac
at anna.isaac@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
February 28, 2020 16:10 ET (21:10 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.