February 28, 2020 / 10:00 AM / 3 months ago

U.S. two-year Treasury yields slide below 1% for first time since 2016

LONDON (Reuters) - Two and five-year year U.S. Treasury yields slid below 1% for the first time since 2016 on Friday, in a further sign that investors are bracing for the economy to take a hit from the spread of coronavirus.

Countries on three continents reported their first cases of the coronavirus on Friday as the world prepared for a pandemic of the disease and investors dumped equities in expectation of a global recession.

With share prices set for their worst week since the global financial crisis in 2008 as virus-related disruptions to global travel and supply chains fueled recession fears, investors flocked to safe-haven government bonds.

The two-year U.S. Treasury yield fell to 0.96% US2YT=RR, its lowest level since late 2016 and was last down almost 14 basis points on the day.

Five-year U.S. Treasury yields also fell more than 10 bps to 0.97% US5YT=RR, hitting their lowest levels since July 2016.

“The last time we were at these levels in Treasury yields the Fed Funds rate was between a quarter and a half-a-percent, so this suggests the market is thinking that Fed rates will be going down these levels before too long,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“The market is pricing in a rate cut by March and three rate cuts this year, which is a huge turnaround from the start of the year. But the fact that it looks like coronavirus has a long way to go means this is not surprising.”

Money markets have now moved to price around three 25 basis point rate cuts from the U.S. Federal Reserve in the next 12 months.

Earlier, 10-year Treasury yield fell to a new record low at around 1.17% US10YT=RR. It was down almost 13 basis points on the day and set for its biggest one-day fall since early December.

Reporting by Dhara Ranasinghe; editing by Sujata Rao and Giles Elgood

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