By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – U.S. benchmark 10-year Treasury yields on Tuesday slid below 1% for the first time, after the Federal Reserve slashed interest rates by half a percentage point in an emergency move to ease the economic fallout from the fast-spreading coronavirus.
U.S. yields were down across the board after the Fed action, as investors grabbed safe-haven Treasuries amid the uncertainty.
In a statement, the central bank said it was cutting rates by 50 basis points to a target range of 1.00% to 1.25%. “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” it said.
Investors expected the U.S. rate cut after the Fed issued a statement late on Friday. But they did not expect the central bank to move so quickly ahead of a scheduled monetary policy meeting later this month.
“At first, it looked like it was positive, but now stocks are selling off and rates are rallying,” said Paula Solanes, senior portfolio manager, at SVB Asset Management in San Francisco.
“Maybe part of this is the fact that it’s sinking in that the coronavirus is very real and may have ramifications for the U.S. economy, aside from the global economy. And we don’t yet understand the magnitude of it all,” she added.
In late afternoon trading, U.S. 10-year yields Yields on U.S. 30-year bonds On the short end of the curve, U.S. two-year yields fell to 0.712% from Monday’s 0.878% The rates future market has raised bets for another cut at the April policy meeting.
“The Fed kind of botched the operation here. They didn’t need to cut rates because it wouldn’t do anything to prevent the virus from spreading,” said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. “Once again, the Fed gave into the market and I think this has unnerved investors. The whole thing appears ill-conceived,” she added.
The yield curve steepened after the Fed announcement, with the spread between the two-year and 10-year widening to 28.8 basis points John Herrmann, rates strategist at MUFG Securities in New York, said his firm’s models continue to forecast another 25- basis-point cut by the policy meeting next month, and possibly another cut after that meeting. (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Brettell; editing by Jonathan Oatis, Dan Grebler and David Gregorio)
