10-year Treasury yield drops to record low of 1.31% as coronavirus hits the global economy

The yield on the benchmark 10-year Treasury note fell about more than 6 basis points to 1.312% during morning trading, below its previous record low of 1.325% set on July 6, 2016 in the aftermath of the United Kingdom’s Brexit vote.

The yield on the 30-year Treasury bond tumbled more than 3 basis points to a new all-time low of 1.798%. The long-duration rate has plunged about 40 basis points this year. Bond yields fall as prices rise.

A sharp rise in cases of the new coronavirus in Italy, South Korea and the Middle East sparked fears of a global pandemic that will slow the world economy. U.S. health officials said that Americans should “prepare for the expectation that this is going to be bad,” sending investors running for cover.

“Should it devolve into an outright pandemic where you can expect to see more material diminution of economic activity, if not even conjure up a heightened risk of recession, then why shouldn’t the 10-year yield break through even a 1-handle,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

The Centers for Disease Control and Prevention said the coronavirus is “likely” to continue to spread throughout the U.S. and outlined what schools and businesses should do if the disease becomes an epidemic. Total confirmed cases globally have surged to more than 80,200 and at least 2,704 people have died of the coronavirus.

Stocks were falling sharply along with the tumbling yields on Tuesday. The Dow Jones Industrial Average was down more than 900 points at its session low after suffering its worst day of losses in two years in the previous session.

National Economic Council Director Larry Kudlow told CNBC that the U.S. has “contained” the coronavirus and it will likely not be an “economic tragedy.”

Federal Reserve officials see the coronavirus as a significant threat to growth, but the extent of that is not known yet, according to Vice Chairman Richard Clarida.

“The disruption there could spill over to the rest of the global economy,” Clarida said Tuesday. “But it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.” Should that outlook change, he said, “we will respond accordingly.”

Fed rate cut?

Amid the escalated coronavirus fears, traders are now pricing in a 60% chance of an interest rate cut at the Fed’s April meeting, according to the CME. The market also assigns a 40% of three cuts before the end of 2020.

“The curve has flattened as yields have declined,” said J.P. Morgan interest rates strategist Jay Barry. “It would be more representative of traditional Fed easing dynamics rather than a flight-to-quality. If this directionality persists, it would indicate markets are expecting the Fed to respond imminently to the economic disruption caused by the virus and ease.”

Kudlow said, however, he doesn’t expect the Fed to cut interest rates in a move to protect markets from the impact the coronavirus.

Fed officials have stated recently rates are in the right place considering current economic conditions. Plus, many believe the coronavirus is presenting a supply shock, which monetary policy does little to help.

Yields also retreated Tuesday after data showed consumer confidence rose less than expected in February as people’s assessment of current conditions wavered, fueling concerns about an economic slowdown.

With the conoravirus disrupting the global supply chain, Goldman Sachs slashed its U.S. GDP forecast for the first quarter to just 1.2%, drastically slower than the 2.1% increase in the fourth quarter and 2.3% for the full year 2019. The bank also cut its economic outlook for China.

Many investors have blamed global central banks’ persistent monetary easing measures for the falling yields. Global policy makers have been slashing interest rates at the fastest pace since the financial crisis, with more than 25 cuts since the start of 2019, according to Deutsche Bank. About $15 trillion of government bonds worldwide now trade at negative yields, the bank said.