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Markets

Yields hold near three-month lows as virus concerns remain

Traders are betting that the ongoing concerns about the economic impact of the Chinese virus, and tepid inflation,
31 Jan 2020
  • Traders are betting that the ongoing concerns about the economic impact of the Chinese virus, and tepid inflation, could lead the Federal Reserve to cut rates.
  • The closely watched yield curve between three-month bills and 10-year notes was flat on Friday.
  • Benchmark 10-year note yields were last 1.555%, after falling to 1.534% on Thursday, the lowest since Oct. 9.

NEW YORK: U.S. Treasury yields held just above three-month lows on Friday as investors evaluated the economic impact of China's spreading coronavirus, and before a heavy week of economic data.

The virus has spread to more than 20 countries and regions.

As of Friday China had reported 213 deaths and 9,800 cases, with number of people infected surpassing the total during the 2002-2003 SARS epidemic.

"We may have this underlying bid (for Treasuries) for some time, just until more is known about the coronavirus; how much it's spread, the timeline, vaccines, etc.," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.

Benchmark 10-year note yields were last 1.555%, after falling to 1.534% on Thursday, the lowest since Oct. 9.

The yields have some technical support in the 1.50%-1.55% area.

They have dropped from 1.946% on Jan. 2.

Traders are betting that the ongoing concerns about the economic impact of the Chinese virus, and tepid inflation, could lead the Federal Reserve to cut rates.

The U.S. central bank affirmed on Wednesday that it is on hold for the time being.

Interest rate futures traders are pricing in a 72% chance of at least one rate cut by September, according to the CME Group's FedWatch Tool.

Two-year note yields, which are the most sensitive to interest rate policy, fell to 1.367% on Thursday, the lowest since Sept. 2017, before rebounding to 1.389% on Friday.

The closely watched yield curve between three-month bills and 10-year notes was flat on Friday, after inverting during two days this week, in a bearish signal for the U.S. economy.

That part of the yield curve inverted last March for the first time since the financial crisis, signaling the potential for a recession in a year or two.

Some analysts and investors, however, think loose monetary policy globally could result in any downturn taking longer to materialize, making the signal less reliable than in the past.

The Treasury Department on Wednesday will give its refunding plan for the coming quarter, which will be of extra interest for market participants since the government said earlier this month that it plans to relaunch the 20-year bond.

Next week will also feature a heavy schedule of data, including Friday's jobs report for January.