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Markets

Bond yields near record lows after Fed rate cut

The surprise 50-basis-point cut, the Fed's first off-schedule move since 2008, came with comments highlighting both
04 Mar 2020
  • The surprise 50-basis-point cut, the Fed's first off-schedule move since 2008, came with comments highlighting both the scale of the challenge and the limits of monetary policy.

LONDON/HONG KONG: Bonds held their gains on Wednesday as investors digested the U.S. Federal Reserve's dramatic move to cut interest rates in an effort to contain economic damage from the coronavirus.

The surprise 50-basis-point cut, the Fed's first off-schedule move since 2008, came with comments highlighting both the scale of the challenge and the limits of monetary policy.

In response, the benchmark 10-year U.S. Treasuries yield , which falls when prices rise, held below 1% - not far over the overnight low of 0.9060%.

Euro zone bond yields also held near record lows, with Germany's benchmark 10-year Bund yield around -0.64%, near six-month lows set on Monday.

Some saw the Fed's extraordinary move as a decision to move hard and early because it expected further economic damage from the spread of the coronavirus.

"They have signalled willingness to take further action, which is why we are seeing a further rally in bonds," said Tim Drayson, head of economics at Legal & General Investment management. "Some argue that monetary policy can't fight the supply shock - but it will support demand and confidence."

With safe-haven currencies in demand, the dollar was near five-month lows versus the yen and fell to its lowest against the Swiss franc in almost two years. It was flat against a basket of six major currencies.

Global stock markets were mixed as investors digested the Fed's move and a strong performance by Joe Biden in the Democratic Party primaries in the United States.

The Euro STOXX 600 gained 0.7%. Markets in Frankfurt and London rose around 0.8% and Paris  0.7%. On Wall Street, S&P 500 futures climbed 1.5% on Biden's showing, after falling overnight despite the Fed's rate cut.

Biden, a moderate considered less likely to raise taxes and impose new financial regulations, won primaries in at least eight states. That set up a one-on-one battle for the Democratic presidential nomination with democratic socialist Bernie Sanders.

The European moves built on gains for Asia-Pacific markets, where MSCI's broadest index of shares outside Japan  rose 0.3%.

Korean stocks gained 2% on a $9.8 billion government stimulus package to mitigate the coronavirus impact.

The MSCI world equity index, which tracks shares in 49 countries, gained 0.2%.

CUTS NOT ENOUGH?

The Fed's surprise move followed a shift in money market pricing late last week. Futures swung rapidly to anticipate such a cut at the Fed's March meeting.

Now, they imply another 50 basis points of easing by July, even though investors and the Fed itself raised doubts that easing will help deal with a public health crisis.

"If you're in China and you can direct liquidity exactly where you need to, and have rate cuts where you want them to be, monetary policy  is very effective," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

"In the West, in a democracy, monetary policy is less effective - you need to incentivise banks to do what is in to the benefit of the whole."

The coronavirus has killed more than 3,000 people, about 3.4% of those infected - far above seasonal flu's fatality rate of under 1%. It continues to spread beyond China -- Italy reported a jump in deaths to 79 and South Korea reported more than 500 new cases on Wednesday.

"The question here is whether a conventional interest rate response is sufficient," said Sameer Goel, chief strategist, Asia macro, at Deutsche Bank in Singapore.