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

US Treasury yields slid to new lows in Asia while stock markets rebounded as investors pinned their hopes on central banks unleashing a wave of easing measures to cushion the economic hit from the coronavirus outbreak.

Japan’s Topix climbed 1 per cent on Monday, while in late afternoon trading China’s CSI 300 of Shanghai- and Shenzhen-listed stocks was up 3.3 per cent — on pace for its best one-day performance since May.

S&P 500 futures added 0.4 per cent, while contracts for London’s FTSE 100 stock benchmark were up 1.8 per cent.

The gains came after the Bank of Japan signalled that 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 3.1 per cent to $51.14 a barrel.

Equities had initially sold off across Asia after China’s official manufacturing purchasing managers' index at the weekend showed factory activity plunged to an all-time low in February, as the coronavirus knocked swaths of economic activity offline.

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

In early trading on Monday the yield on 10-year US Treasuries fell as much as 11 basis points to a record 1.0347 per cent, before pulling back to a 5 basis-point slide. 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 now think it is almost certain that the Federal Reserve will cut interest rates when it meets later this month. Chairman Jay Powell has said the US central bank is “closely monitoring” developments.

“Policymakers want to avoid a more disorderly tightening of financial conditions that could further exacerbate the economic shock,” analysts at Pimco wrote in a note on Monday.

Governments are taking action to support their economies during the virus outbreak. Italy said it will 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.

China’s onshore-traded renminbi strengthened to 6.9704 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