U.S. long-dated yields drop to new record lows on Fed cut outlook

March 2, 2020

NEW YORK (Mar 2) - U.S. Treasury prices rose sharply on Monday, pushing long-dated yields to fresh record lows, as bond investors braced for a slew of stimulus measures that include interest rate cuts from global central banks to ease the economic impact of the coronavirus.

U.S. two-year yields also dropped, falling to a near four-year trough, with U.S. yield curves steepening as investors priced in easing from the Federal Reserve. The Fed, Bank of Japan, and Bank of England all indicated willingness to take action to support their economies in the midst of the fallout emanating from the coronavirus.

Fed Chairman Jerome Powell late on Friday said the central bank will "act as appropriate" to support the economy in the face of risks posed by the coronavirus epidemic, though he said the economy remains in good shape overall.

Investors took his comments as a hint that the Fed will deliver a cut when it meets later this month, and as an encouragement to central banks around the world to follow suit. Fed funds future now imply a 50 basis point cut at the meeting, according to the CME FedWatch.

"The last time we saw that language from the Fed was last year before the first rate cut," said Michael Chang, interest rates strategist at Societe Generale in New York. "The market priced that rate cut very quickly.

So the question right now would be the magnitude of the rate cut: whether it's 25 basis points, or 50 basis points," he added. BoJ Governor Haruhiko Kuroda also said the Japanese central bank would take steps to stabilize markets if needed, while the Bank of England said it, too, was monitoring developments and assessing the "potential impacts" on the global and UK economies and financial systems.

"The coordination among central banks in terms of stimulus measures is very positive for bonds," Chang said. In morning trading, U.S. 10-year yields fell to 1.080%, from 1.126% late on Friday.

Earlier in the session, 10-year yields fell to a new record low of 1.03%. Yields on U.S. 30-year bonds were at 1.643%, down from 1.668% on Friday, after earlier sliding to an all-time trough of 1.583%.

On the short end of the curve, U.S. two-year yields fell to 0.794% from Friday's 0.878%, after hitting a nearly four-year low of 0.71%. The yield curve also steepened on Monday, with the spread between the two-year and 10-year widening to 34.5 basis points , the widest gap since early January.


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