An Update on Treasury Yields
It was only last week, on February 19th, that the SP 500 ended the day at its all-time closing high, up over 5% since January 1st. Throughout the rally, interest rates continued to trend down –perhaps in anticipation of continued central bank accommodation worldwide. Between January 1st and Feb 19th, the yield on the 10-Year US Treasury fell from 1.92% to 1.57%, a decline of 35 bps, with the downward trend largely predating the coronavirus outbreak.
The yield on the 10-year Treasury now stands at 1.28%, with the decline having been accelerated by concerns about the coronavirus. All indications are that rates will continue to trend lower. Since a large portion of the accelerated yield decline is attributable to market anxiety about the spread of the coronavirus, a rebound in rates is possible if fears abate, but any such rebound is likely to be limited in scope and duration. Apart from the human toll, we can anticipate at least a few economic consequences, resulting in a modification of the GDP growth projections worldwide. And while the extent and duration of these consequences are still speculative, pressure is building on central banks to take action sooner rather than later.
10-Year US Treasury
Source: Bloomberg as of 2/27/2020.
ECB President Christine Lagarde said today that it is still too early to determine if what is going on is a “long lasting shock” that would require a monetary policy response. While central banks cannot be expected to take action for every instance of market volatility, sustained market selloffs can often be self-fulfilling. We believe there in increased likelihood that we will see clear signs of additional central bank accommodation soon -perhaps a matter of days.
So, even if the disease turns out to be less of a threat than currently feared, its impact on the markets as well as the possibility of some negative consequences to GDP growth suggest that downward pressure on rates will continue. Any V-shaped recovery in equities is unlikely to be mirrored with a V-shaped rebound in bond yields.
Senior Vice President, Direct Client Investments