- US 10-year yield hits new lifetime low as stock rout continues.
- Coronavirus is expected to push the global economy into contraction.
- Fed is expected to cut rates in response to the risk-off and growth concerns.
The yield on the 10-year Treasury note has dropped to a new record low with the US stock index futures pointing to another risk-off day of trading.
At press time, the benchmark yield is trading at 1.11%, down 1.3 basis points on the day, having dropped from 1.475% to 1.15% last week. The two-year yield is also trading a record low of 0.79%. Meanwhile, the futures on the S&P 500 are currently down 1.16% and major Asian indices like Nikkei, S&P/ASX 200 and Kospi are shedding 1.3, 2.6 and 0.64%, respectively.
Investors are selling risk on Monday morning, possibly in response to a deeper-than-expected contraction in China’s manufacturing sector and continued spread of the coronavirus.
China’s official manufacturing purchasing managers’ index (PMI) dropped to a record low of 35.7 in February from 50.0 in January. The previous record low of 38.8 was reached in November 2008. Meanwhile, services PMI fell to 29.6 from January’s 54.1 to hit the lowest level since November 2011. The activity contracted as the coronavirus outbreak disrupted logistics and supply chains.
The virus began spreading at a faster rate outside China last week, forcing investors to shun risk, leading to a broad-based risk aversion. For instance, the Dow Jones Industrial Average suffered its worst weekly drop since 2008 and the seven-day sell-off in the S&P 500 wiped out $3.6 trillion in market value.
Goldman Sachs now expects the coronavirus to inflict a short-lived global economic contraction. Meanwhile, markets think there is a 99% chance the Federal Reserve would
cut rates by 25 basis points later this month. Some investment banks have warned of a 50 basis point cut in March and another 25 basis point cut in April.
Treasury yields, therefore, are likely to remain under pressure and could drop below 1%. The decline may happen on Monday if the China Caixin PMI, due at 01:45 GMT, prints well below the estimate of 45.7, bolstering growth concerns.
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