Bond Report: 10-year Treasury yield bounces sharply off 1.03% low as Dow books 1,300-point gain

Treasury yields came off record lows on Monday as stocks surged on expectations for major central banks to prop up financial conditions in response to the COVID-19 outbreak, following the worst week for U.S. equities since the 2008 financial crisis.

What are Treasurys doing?

The 10-year Treasury note yield

TMUBMUSD10Y, -1.05%

fell 4.2 basis points to 1.085%, after hitting an intraday record low of 1.03%. while the 2-year note rate

TMUBMUSD02Y, -3.51%,

sensitive to expectations for Fed policy, declined 5.4 basis points to 0.824%. The 30-year bond yield

TMUBMUSD30Y, -0.84%

was down 1.4 basis points to 1.644%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

Volatile trading in stocks sparked similar moves in bond yields, as the 10-year benchmark nearly breached a level below 1% in overnight trading. Expectations for a strong response by world governments and global central banks have pushed equities higher on Monday, helping to roll back the overnight demand for haven assets like government paper.

In the face of growing worries, the world’s major central banks have started to pay attention to the COVID-19 economic impact, with the Bank of Japan the first to take measures.

Bank of Japan Gov. Haruhiko Kuroda said the central bank would take steps to steady markets, and bolster liquidity through short-term lending operations and asset purchases. This comes after Fed Chairman Jerome Powell issued a statement on Friday saying the U.S. central bank would act as appropriate against the risks posed by the coronavirus.

Investors are now pricing in close to a 50 basis points worth of cuts at the March 17-18’ meeting by the rate-setting Federal Open Market Committee.

And now investors say fiscal authorities may also contemplate loosening the budgetary pursestrings. Finance ministers from the Group of 7 economies are set to hold a call on Tuesday.

But the global economic impact from the coronavirus was also starting to show up in the numbers.

Disappointing Chinese economic data over the weekend highlighted the potential for supply-chain disruptions among global manufacturers, as workers trickle back onto factory floors and businesses look to resume operations. The Chinese official purchasing managers’ manufacturing index and the equivalent Caixin PMI index both reported their lowest reading since the 2008 financial crisis.

In U.S. data, the Institute for Supply Management said its manufacturing index dipped to 50.1% last month from 50.9%. Producers reported supply bottlenecks linked to the coronavirus, which has hampered their ability to get parts. Any reading below 50% indicates deteriorating conditions.

What did market participants’ say?

“[Equities] are bouncing back considerably to start this week, which has much to do with the prospect for stimulus from governments across the globe in response to COVID-19. Multiple prominent central bankers have gone out of their way to state they remain ready to act as appropriate in response to the outbreak,” said Michael Reynolds, investment strategy officer at Glenmede Trust, in an interview.

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