By Sam Goldfarb and Caitlin Ostroff
The yield on the benchmark 10-year U.S. Treasury note fell to an
all-time low Tuesday, the latest milestone in a decadeslong bond
rally driven by persistently low inflation and turbocharged by
worries the coronavirus could disrupt an already-sluggish global
economy.
After hovering below 2% for several months, the 10-year yield
was pushed sharply lower by reports that coronavirus cases had
surged in countries as disparate as Italy, South Korea and Iran. As
investors fled riskier assets for safer ones, like bonds, the Dow
Jones Industrial Average fell more than 2% Tuesday, while U.S.
crude oil lost more than 2.5%.
In recent trading, the 10-year yield was as low as 1.317%,
according to Tradeweb, compared with 1.377% Monday. That breached
Tradeweb's previous intraday low of 1.325% set in July 2016 after
the U.K.'s vote to leave the European Union and was also below the
record closing low of 1.364% set the same month. Yields fall when
bond prices rise.
Treasury yields are a key economic gauge, typically rising when
growth and inflation are accelerating and sliding when the economy
is losing steam. They also play a critical economic function by
helping determine borrowing costs for consumers, businesses, and
state and local governments.
Most analysts agree that yields have been depressed in recent
years by long-term structural factors, such as stubbornly slow
global growth, even more muted inflation, and ultralow interest
rates set by the world's major central banks.
New coronavirus infections outside of China have threatened to
exacerbate those conditions by disrupting supply chains, depressing
global travel and potentially leading to a new round of monetary
stimulus.
How far Treasury yields fall "depends on how much the virus
spreads," said Mary Ann Hurley, vice president of fixed-income
trading at D.A. Davidson & Co. "I think there's a floor, but I
don't know quite where it is. We're in uncharted territory."
A handful of factors influence Treasury yields. One is the level
of short-term interest rates set by the Federal Reserve. Another is
inflation, which erodes the purchasing power of bonds' fixed
payments.
As it stands, the Fed's benchmark federal-funds rate is set
between 1.5% and 1.75%, and an increasing number of investors now
expect at least two more interest-rate cuts later this year.
Meanwhile, inflation remains muted, with the Fed's own preferred
gauge remaining stubbornly below its 2% annual target.
Until recently, investors have been comforted by forecasts that
the economic damage from the coronavirus would be relatively
short-lived, both around the world and in the U.S.
On Friday, however, some of that confidence was dented when a
measure of manufacturing and service-sector activity fell to its
lowest level in more than six years. On Sunday, officials from the
Group of 20 major economies also warned that the coronavirus posed
a serious risk to global growth. And stocks fell sharply Monday
after largely shrugging off coronavirus concerns in previous
weeks.
Investors are "definitely worried about global growth and what
global growth will look like even if we do get a medium-term
resolution," said Michael Lorizio, a senior trader at Manulife
Investment Management.
Looking beyond the record, analysts said the bond market has
been sending mixed signals about the economy.
One concerning development is that the 10-year yield has fallen
well below that of the three-month Treasury bill, a phenomenon
known as an inverted yield curve that often occurs before economic
contractions.
Still, the 10-year yield remains above the yield of other
short-term Treasurys such as the two-year note. Because short-term
Treasurys are particularly sensitive to the outlook for monetary
policy, that is a sign that investors are confident that the Fed
will lower rates relatively soon and possibly help the economy.
Treasury yields, notably, have been depressed for years and
stock indexes have continued to climb to records. Though falling
yields can reflect growing economic concerns, they can be helpful
to businesses by lowering borrowing costs. Treasurys are also
heavily influenced by economic conditions and bond yields outside
of the U.S., with yields pulled lower by the trillions of dollars
worth of bonds elsewhere in the world that carry negative
yields.
Yields have trended lower since shortly after the Fed raised its
key policy rate above 19% in June 1981 in an attempt to tame
soaring inflation. These days, many economists are concerned about
the lack of inflation. But its absence has provided a solid base of
support for government bond prices that has persisted even when
investors have grown slightly more optimistic about the
economy.
In recent years, there have been brief moments when investors
thought inflation could rise materially higher, most notably after
President Trump's election in November 2016, when many expected tax
cuts and infrastructure spending to boost growth. But the 10-year
yield has never climbed much higher than 3% and has spent much of
the past five years hovering between 1.5% and 2.5%.
Economists have offered a variety of explanations for why growth
and inflation have been sluggish in recent years. Those include the
historic levels of debt held by governments and businesses, which
some argue has curtailed investment. Some also argue that
technological advancements and global supply chains have held down
the cost of producing goods.
Still, not all investors think that Treasurys will continue
rallying.
After more than a decade of growth, investors keep getting
worried that the U.S. economy is going to falter, but "every time
this has happened, things have snapped back in the other
direction," said Scott Kimball, a portfolio manager at Taplin,
Canida & Habacht LLC.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Caitlin
Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
February 25, 2020 14:35 ET (19:35 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.