The 10-year Treasury bond yield dropped below 1% for the first time in history on Tuesday, as investors grew increasingly worried about the novel coronavirus outbreak.
US government bond yields have been trending lower since the start of the year, but their fall accelerated as US financial markets reacted strongly over the past couple weeks to the potential economic damage from the spreading disease.
Exacerbating those fears, the Federal Reserve delivered an unscheduled half-percentage point interest rate cut on Tuesday to boost the economy in the face of coronavirus. It was its first emergency cut, and the first cut of that size, since 2008.
The Dow plunged more than 750 points Tuesday.
Economists are concerned about the fallout from coronavirus. Week-long factory closures in China and harsh travel restrictions are expected to deal a supply shock to the global economy, amid fears about trade and consumer spending.
Race to the bottom
Bond yields tend to fall in times of trouble when investors are gunning for the relative safety and high liquidity of developed countries’ government debt. Bonds are also a traditional hedge to stock investments. As the stock market has been plummeting, bond prices haveclimbed higher.
Yields and bond prices move opposite to each other.If the price of a bond goes up because of high demand, its yield goes down. The recent bond rally pushed the 10-year Treasury yield to record lows.
Lower interest rates
Treasuries also express investors’ interest rate expectations. So if the 10-year Treasury yield falls, the market tends to expect lower rates in the future.
The amount of government debt with low or even negative yields has been growing over the past years, as central banks around the world have goneback to cutting interest rates. The Fed slashed rates three times in 2019 to boost the economy in the midst of the US-China trade war.
For consumers, lower interest rates can move down rates on retail products, such as mortgages and bank loans. Lower rates are also good for companies looking to refinance more expensive debt.
But for investors, lower rates – and with them lower yields – are a problem for investors looking for a decent return without much risk.
