US Treasury yields at new low as coronavirus hits China’s factories - Financial Times

Stock markets in Asia and Europe steadied on Monday following last week’s heavy sell-off, while US Treasury yields hovered around record lows, as investors pinned their hopes on central banks unleashing measures aimed at cushioning the economic hit from the coronavirus outbreak.

In Asian trade, China’s CSI 300 of Shanghai and Shenzhen-listed stocks closed up 3.3 per cent, chalking up its best one-day performance since May. Japan’s Topix climbed 1 per cent.

An early rally in European equities fizzled in mid-morning trade, with the continent-wide Stoxx 600 adding 0.2 per cent. In London, the FTSE 100 was 1 per cent higher, while Frankfurt’s Dax dropped 0.4 per cent.

The gains came after the Bank of Japan signalled it would inject liquidity into the financial system and hinted at increased asset purchases. The central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases”, Haruhiko Kuroda, BoJ governor, said in a statement.

The brighter mood buoyed crude oil, with the price of Brent, the international marker, climbing 2.6 per cent to $50.95 a barrel.

Equities had initially sold off across Asia after China’s official manufacturing purchasing managers’ index at the weekend showed factory activity in February plunging to an all-time low.

Line chart of Yield on 10-year government bonds (%) showing US Treasury yields tumble towards 1% as odds of Fed cut rise

The yield on 10-year US Treasuries was down about 3 basis points — having fallen as much as 11 points to a record 1.0347 per cent in earlier trade. Yields fall as bond prices rise.

After the S&P 500 last week dropped 11 per cent, marking the Wall Street benchmark’s worst week since the global financial crisis, investors are betting that central banks will step in to try and mitigate the crisis that is threatening global economic growth.

Based on trading of Fed funds futures, investors think it is almost certain that the Federal Reserve will cut interest rates when it meets this month. Chairman Jay Powell has said the US central bank is “closely monitoring” developments.

Governments are taking action to support their economies during the virus outbreak. Italy said it would inject €3.6bn into its economy to mitigate the impact.

Goldman analysts wrote on Sunday that they were forecasting rate cuts of varying magnitudes by central banks from the UK, Canada and Australia to India and South Korea. They now project the Fed will cut rates by 0.5 percentage points in March and another 0.5 percentage points in the second quarter.

Analysts at Rabobank said that regardless of the extent of the policy response, debt would remain an attractive investment option for investors, saying it was “a discernible near-term possibility” that the yield on the US 10-year could drop below 1 per cent.

“While the path for risky assets will be determined by the degree of activism on the part of global policymakers and an associated financially repressive impulse, the outlook for safe havens is unequivocally positive as either aggressive rate cuts provide support or a perceived insufficient policy response underpins a flight-to-quality bid,” they said.

China’s onshore-traded renminbi strengthened to 6.9566 per US dollar after the central bank set the midpoint of the currency’s trading band to below seven for the first time in more than a week.

Ken Cheung, chief Asia currency strategist at Mizuho, said traders were betting that a wave of fiscal stimulus by Beijing could soften the blow to the world’s second-biggest economy from the coronavirus.

“Optimism over a China growth recovery in March is being fuelled by the slowing pace of virus contagion and expectation for China’s strong stimulus,” he said.

Additional reporting by Robin Harding in Tokyo