Treasury 10-Year Yield Sets Record Below 1% on Virus Fears

(Bloomberg) -- Treasuries surged, driving 10-year yields below 1% for the first time ever, as traders bet the Federal Reserve's emergency rate cut might not be enough to prevent the coronavirus from chilling the U.S. economy.

The rate on benchmark 10-year notes sank as much as 25.9 basis points to 0.9043%. Two-year yields declined as much as 28.1 basis points to 0.6223%. Swap spreads tightened, possibly a sign that mortgage investors were forced to hedge their portfolios once the 10-year breached 1%, exacerbating the move.

Though the Fed met Wall Street's hopes for aggressive action with its half-point reduction, Chairman Jerome Powell seemed to unnerve markets by saying it's unclear how long the virus's impact will last. Traders were already pricing in another rate cut later this month, with more to come in June.

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“The market is trading right now on a lot of fear and uncertainty,” said Gary Pollack, head of fixed income at DWS Investment Management. “The Fed certainly didn't bring calm, and the virus continues. The Fed's relatively large move also made people wonder what they know that we don't.”

The central bank's decision came a few hours after Group-of-Seven finance chiefs issued a coordinated statement saying they were ready to act to shield their economies from the virus. Policy makers faced pressure to act after the OECD warned the world economy faces its “greatest danger” since the 2008 financial crisis.

U.S. stocks initially surged after the Fed's decision, but that quickly petered out and the S&P 500 plunged in afternoon trading amid the bond rally.

“The market is calling into question how much of an effect the Fed can have on the current situation,” said Jason Ware, managing director and head of institutional trading at the broker-dealer subsidiary of 280 CapMarkets. “The market is not confident that cutting rates is going to help out.”

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Long-term Treasury yields have hit record lows this week and the pile of negative-yielding debt around the world has grown as the economic backdrop soured and fears of a pandemic mounted. In another sign of deep concern about the economic growth outlook, the yield on 30-year inflation-linked Treasuries fell below zero for the first time.

“My colleagues and I took this action to help the U.S. economy keep strong in the face of new risks to the economic outlook,” Powell said during a press conference Tuesday. “The spread of the coronavirus has brought new challenges and risks.”

Wall Street economists, including those at Goldman Sachs Group Inc., had predicted that Fed would cut rates by 50 basis points this month -- and follow with additional easing. Goldman forecasts another 50 basis points in cuts by the end of June. The next Federal Open Market Committee meeting is scheduled for March 17-18.

In the wake of the Fed's move and Powell's comments, JPMorgan Chase & Co.'s chief U.S. economist Michael Feroli pulled forward to the March meeting a call for a quarter-point cut. Feroli had previously expected additional easing to come in April.

“There is some sense that the Fed is kind of shooting their bazooka off and might know something else, that this pandemic might get substantially worse in the U.S.,” said Donald Ellenberger, a senior portfolio manager at Federated Investors Inc. “This is a market that is simply being driven by fear.”

--With assistance from Vivien Lou Chen, Edward Bolingbroke and Elizabeth Stanton.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Mark Tannenbaum

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