Changing tactics
Plunging yields force investors and Fed to rethink strategy
WASHINGTON » The response in stock markets to the growing risk from the coronavirus has been swift and fierce. But a better gauge of fear on Wall Street may be the bond market, where the moves over the past few weeks have been even more breathtaking.
Interest rates on a range of U.S. government bonds have plunged to all-time lows as investors seeking relative safety from stocks have furiously snapped them up . (As the price of a bond goes up, its interest rate, or yield, declines.)
The yield on the 10-year Treasury — a benchmark for mortgages and other consumer debt — was 1.9% as recently as Dec. 24. On Friday, it dipped below 0.7 percent before finishing the day at 0.79%.
“The bond market is already pricing in a worst-case scenario — a U.S. and global recession,” said Scott Anderson, chief economist at Bank of the West.
The plunging yields across bond markets could hamstring the Federal Reserve’s ability to respond to a future recession. During previous economic slumps, the Fed has sought to drive down longer-term rates to try to stimulate borrowing and spending. But with those rates already nearly as low as they can go, the Fed now has less firepower at its disposal.
The shrunken bond yields will also make it harder for those who invest in them to earn much income: The return on the benchmark 10-year Treasury note is now less than half the inflation rate. After adjusting for inflation, an investor who buys a Treasury will effectively lose money over the course of the loan.
The widespread uncertainties surrounding the viral outbreak have punished stocks for the past two weeks. From the record high that the Standard &
Poor’s 500 stock index set two weeks ago, it’s now shed 12% of its value.
The virus has cut off many needed parts and supplies from China and caused business travel restrictions, jeopardizing sales at hotels and airlines and raising the specter of job losses. Yet so far, there is little hard data to help investors determine how severe the impact will be. Because it can take four to six weeks for parts to ship from China, the impact of China’s factory shutdown hasn’t yet been fully felt by U.S. businesses.
The scant yields aren’t stopping panicky investors from