March 5 (Reuters) – A dramatic rally in US Treasuries over the past week that pushed yields down to historically low levels could still occur as the coronaviurus spread leads analysts to revise forecasts downward economic growth, while the Federal Reserve is expected to continue cutting rates.
Yields plummeted as fears about the virus drove stocks down and led investors to seek US Treasuries. The 10-year benchmark rates fell below 1% for the first time Monday and Thursday to 0.93%.
On Tuesday, the Federal Reserve lowered its rates by 50 basis points in the range of 1% to 1.25%. But its first emergency cut since the financial crisis has not yet calmed the markets.
“It is really difficult to reach 50 basis points before the meeting and then do nothing at the meeting,” said Ian Lyngen, head of US rate strategy at BMO Capital Markets in New York. “For better or worse, the Fed could have inadvertently or purposely locked itself in another move in two weeks.”
Two-year treasury bill yields, which are very sensitive to interest rate fluctuations, plunged to 0.55%, the lowest since July 2016, when the federal funds rate was between 0.25% and 0.50%.
A 25 basis point cut at this month’s Fed meeting is fully integrated, and interest rate futures traders see a 67% chance of a 50 basis point cut, according to L CME Group’s FedWatch tool.
Further down the line, traders see a 31% chance that rates will be 0-0.25% in December, according to CME data.
The spread of the coronavirus has significantly shaken market perceptions of growth, and economic projections are only catching up, analysts at JPMorgan said.
“The next domino to fall is probably growth forecasts,” JPMorgan analysts led by Joshua Younger said on Wednesday.
“To the extent that the tone of macroeconomic research remains bullish for Treasuries and indicates the risk of further declines in global growth expectations, this should be another headwind against higher yields,” they said.
John Herrmann, rate strategist at MUFG Securities in New York, sees a deterioration in the economic situation with demographic changes that slow growth, the job situation is getting worse and inflation remains below the target of 2 % of the Fed.
He expects the Fed to cut rates by an additional 50% in the next two meetings, to the range of 0.50% to 0.75%, before stopping to assess the impact of the cuts. However, as growth is expected to slow further in 2021, the Fed should continue to cut rates to zero in an attempt to reverse the recession.
“The most logical thing to do is to reduce it to zero,” said Herrmann.
It would be revisiting 2008 when the Fed lowered rates in the 0 to 0.25% range where they remained until the end of 2015.
To take advantage of the movements, Herrmann recommends that investors hold long positions in short-term interest rate and fed fund futures. (Edited by Megan Davies and David Gregorio)