The US Treasury yield curve, whose movements are watched by traders for harbingers of recession, has become inverted again as the intensifying coronavirus outbreak revived fears of a global growth slowdown.
For the first time since October, the yield on three-month US Treasury bills jumped above that on the benchmark 10-year note. An inversion of this portion of the yield curve — which charts yields on debt of different maturities — has preceded every recession of the last half century.
The gap widened to as much as minus 3.9 basis points on Thursday after the yield on the 10-year Treasury slipped to 1.5 per cent.
Fearing the economic damage from the fast-spreading coronavirus, investors eschewed global equities and sought the relative safety of government debt, sending yields, which move inversely to price, lower.
The death toll climbed to 170 people on Thursday, with more than 7,700 people sickened in mainland China. Adding to angst in the US, the Centers for Disease Control confirmed the first case in the country of person-to-person transmission of the virus, adding to the five Americans who have already been diagnosed.
“Every morning we have a new number that seems to be double the previous number and that gets people on edge and gets people wondering . . . how many more millions of people will be quarantined?” said Kathy Jones, chief fixed-income strategist at Charles Schwab.
According to James Sweeney, chief economist and chief investment officer for the Americas at Credit Suisse, the impact on growth is likely to be sizeable.
“There is no doubt that this poses a substantial downside risk to Chinese growth immediately and global growth in the next few months,” he warned.
Millions in China have been quarantined, businesses shuttered and holidays extended to contain the outbreak. Airlines have halted flights, and the UK Foreign Office has joined others in warning against all but essential travel to China. Also on Thursday, Russia shut its land border with its south-eastern neighbour.
The US Treasury yield curve inverted on several occasions last year for the first time since the global financial crisis as trade tensions between the US and China frayed. The Federal Reserve responded to global growth concerns then by slashing US interest rates by a cumulative 75 basis points between July and October.
Jay Powell, Fed chairman, said at a news conference on Wednesday that the central bank was “carefully monitoring” the outbreak and its impact on the economic outlook, adding that “there will clearly be implications at least in the near term for Chinese output”.
Jim Paulsen, chief investment strategist at the Leuthold Group, said the raging public health crisis could prompt a similar reaction from the central bank.
“Coronavirus has replaced the trade war as the Fed’s primary unknown, and makes them err on the side of easing,” he said.
According to David Lafferty, chief market strategist at Natixis Investment Managers, that may not be the only reason to think the Fed will cut rates further this year.
“The more likely candidate for a rate cut sooner rather than later would be continued downward pressure on inflation,” he said, adding that Mr Powell sent a very dovish signal when he said the central bank is not comfortable with inflation running persistently below its 2 per cent target, as it has been.
Since the start of the year, traders have become convinced there will be one cut by the Fed this year and have sharply increased their bets on two, according to futures prices compiled by Bloomberg.
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January 31, 2020 at 03:23AM
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