Bond Report: Treasury yields fall on coronavirus worries, as Fed stays on hold

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U.S. Treasury yields slipped Wednesday as the spread of the coronavirus again drew unease from bond investors, but stocks continued to shrug off fears that global economic growth would succumb to the illness.

The Federal Reserve’s two-day meeting did not draw significant attention after it announced that it would keep interest rates steady.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -4.26%   fell 3.5 basis points to 1.606%, while the 2-year note rate TMUBMUSD02Y, -3.49%   was down by a more modest 1.4 basis points to 1.443%. The 30-year bond yield TMUBMUSD30Y, -3.23%   slipped 3.8 basis points to 2.057%.

What’s driving Treasurys?

The coronavirus dominated the attention of market participants after health officials reported that the number of cases surpassed the deadly SARS, or severe acute respiratory syndrome, in China, but the death toll is lower. The number of confirmed cases jumped to 5,974, surpassing the 5,327 in mainland China during the SARS outbreak in 2002-2003. The death toll rose to 132 compared to the 348 killed in China by SARS.

See: Junk-bond market gets first big test of year from coronavirus

The Federal Reserve wrapped up its two-day meeting on Wednesday and the central bank kept its benchmark interest rate at a range between 1.50% to 1.75%. It underlined that economic growth was expanding at a moderate pace, and that the current monetary policy stance was supportive of inflation returning to the 2% target.

As expected, the Fed raised its interest rate on excess reserves by 5 basis points to 1.60%, as part of its efforts to prevent its benchmark fed funds from falling below the central bank’s target range. It also said it would extend repurchasing operations through April, in which it lends funds in return for collateral in the form of Treasurys or mortgage-backed bonds.

In economic data, U.S. advance trade in goods over December widened to a $68.3 billion deficit, exceeding analysts’ expectations for a $65.6 billion shortfall. U.S. pending home sales figures for last month fell by 4.9%, from a 1.2% increase in the previous month.

What did market participants’ say?

“The Fed has been clear that a material change in its outlook is necessary for it to react, in either direction. Looking ahead, we see a much higher bar for hikes than cuts. It would take materially higher inflation on a sustained basis for them to hike again, while it’s not hard to envision a scenario that requires additional cuts,” wrote Margaret Steinbach, fixed-income specialist at Capital Group.

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