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Bond Yields Slide After the Fed Cuts Rates: Live Markets Updates Bond Yields Slide After the Fed Cuts Rates: Live Markets Updates
(about 1 hour later)
Investors on Wall Street reacted to an emergency cut in interest rates by the Federal Reserve on Tuesday with renewed concern about the economic fallout of the spreading coronavirus outbreak. The Federal Reserve delivered the emergency rate cut investors had been clamoring for at 10 a.m. on Tuesday morning. The market rally that followed lasted about 15 minutes.
The S&P 500 fell more than 3 percent, and the yield on 10-year Treasury notes tumbled below 1 percent for the first time ever. That suggests investors are cutting expectations for economic growth and inflation, and, perhaps, expecting the Fed to lower rates again when it makes its next monetary policy decision on March 18. By late Tuesday, stocks were sharply lower and bond yields had plummeted to previously unthinkable lows, suggesting that investors think there’s little the Federal Reserve can do to keep the coronavirus from hammering the U.S. economy.
“Lower rates are good but clearly this signals that investors were right to worry about lower economic growth and corporate profits,” said Randy Watts, chief investment strategist at William O’Neil, an equity research and advisory firm. The S&P 500 fell about 2 percent, undoing some of Monday’s 4.6 percent surge. The yield on 10-year Treasury notes tumbled below 1 percent.
After shrugging off the potential impact of the spreading coronavirus for weeks, investors in the United States have become intensely focused on every development in the outbreak as the number of cases outside of China has grown — leading to increased measures to contain the spread. From travel bans to canceled conferences, all these steps could hurt corporate profits and the broader economy. Both moves suggest investors see growing threats to the outlook for economic growth and corporate profits over the next 10 months.
Reflecting this worry, the Federal Reserve slashed interest rates by half a point on Tuesday. “In the short term, there’s only so much that the Fed can actually do because you’re dealing with a totally exogenous variable that it has no control over: the virus,” said Julian Emanuel, chief equity and derivatives strategist at the brokerage firm BTIG.
“The coronavirus poses evolving risks to economic activity,” the central bank said in a statement. After shrugging off risks related to the spreading coronavirus for weeks, investors in the United States now fixate on every development in the outbreak as the number of cases outside of China has grown.
The cut came as economists around the globe sharply downgraded their economic growth expectations for the year as the coronavirus spreads, idling factories, curtailing travel and quarantining workers. The key question is how much measures to contain the drift of the outbreak — from travel bans, to canceled conferences, to the potential for school closures — could hurt consumer spending in developed nations, as global supply chains in China continue to struggle.
Still, some analysts said the Fed’s move would do little to calm investors or bolster the economy. Economists around the globe sharply downgraded their economic growth expectations for the year. JPMorgan Chase economists and market analysts estimated that the low interest rates in the Treasury market suggest investors are pricing in a 90 percent chance of recession, according to a research note published Tuesday afternoon.
Policymakers can bolster confidence and help to keep borrowing cheap, but there are questions about how effective rate cuts will be in counteracting the virus fallout. Central banks cannot keep disease from spreading, prevent workers from losing hours at work or mend broken supply chains amid factory delays. In the face of a growing threat to the economy, the Federal Reserve slashed interest rates by half a point on Tuesday, saying in a statement that the coronavirus posed “evolving risks to economic activity.”
“You just used a pretty big bullet that is going to be ineffective in the near term,” said Yousef Abbasi, a global market strategist at INTL FCStone, a brokerage firm. But the reaction from stock and bond markets in afternoon trading was clear, analysts said: A slowdown is coming and the Fed can’t do much about it.
For the past week, long-term bonds have been flashing a warning light.
As stock markets plunged, bond yields sank to record lows. (As bond prices rise, yields fall. And vice versa.)
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That tumble in yields, for the most part, is the result of a giant rush for safety among global investors. United States government bonds are considered the safest financial investment you can make — the security blanket of choice for investors worldwide. Monetary policy can help support markets. And the Fed and other central banks can help to keep borrowing cheap, for companies and consumers.
It makes bond yields a highly visible sign that investors believe economic growth in the United States and around the world would decelerate quickly. But no one knows whether that matters as in the face of the deep uncertainty of the coronavirus. Central banks cannot keep disease from spreading, prevent workers from losing hours at work or mend broken supply chains amid factory delays.
For the past week, long-term government bonds have been flashing a warning.
Yields on these bonds have fallen as global investors have rushed to safety. U.S. government bonds are considered the safest financial investment you can make — the security blanket of choice for investors worldwide — and when investors are buying these bonds, their yields fall.
The drop in bond yields is a highly visible sign that investors believe economic growth in the United States and around the world would decelerate quickly.
“Global G.D.P. is getting clobbered,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. “That’s what people are focusing on, and that’s what the bond market is focusing on.”“Global G.D.P. is getting clobbered,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. “That’s what people are focusing on, and that’s what the bond market is focusing on.”
But there’s a silver lining to the drop in yields, too. Treasury yields are the foundation for all sorts of borrowing costs, so, all else being equal, the drop in yields should help support the U.S. economy as they filter through to consumers and corporations over the next year. But there’s a silver lining: Treasury yields are the foundation for all sorts of borrowing costs, so, all else being equal, the drop in yields should help support the U.S. economy as they filter through to consumers and corporations over the next year.
Mortgage rates could fall to new levels of affordability. Interest rates on car loans could fall. Corporate borrowing could get cheaper. Mortgage rates could fall to new levels of affordability. Interest rates on car loans could decrease. Corporate borrowing could get cheaper.
Before the Fed’s announcement, central bankers and political leaders of the world’s economic powers on Tuesday expressed their resolve to combat economic damage from the coronavirus, but stopped short of promising interest rate cuts or other immediate rescue measures.Before the Fed’s announcement, central bankers and political leaders of the world’s economic powers on Tuesday expressed their resolve to combat economic damage from the coronavirus, but stopped short of promising interest rate cuts or other immediate rescue measures.
The joint statement of solidarity showed that the leaders of the so-called G7 nations, which also includes Britain, Canada, France, Germany, Italy and Japan, are capable of cooperation. But the statement fell short of the more aggressive action that investors have been hoping for and that many economists say is needed to prevent the virus outbreak from undermining global growth.The joint statement of solidarity showed that the leaders of the so-called G7 nations, which also includes Britain, Canada, France, Germany, Italy and Japan, are capable of cooperation. But the statement fell short of the more aggressive action that investors have been hoping for and that many economists say is needed to prevent the virus outbreak from undermining global growth.
Earlier Tuesday, the Reserve Bank of Australia cut its interest rates to a record low, while Malaysia’s Bank Negara cut its key lending rate for a second time this year.Earlier Tuesday, the Reserve Bank of Australia cut its interest rates to a record low, while Malaysia’s Bank Negara cut its key lending rate for a second time this year.
As governments seek to contain the economic damage from the coronavirus outbreak, prominent economists and some lawmakers are starting to wrestle with how the government might use its power to tax and spend to mitigate the economic pain.As governments seek to contain the economic damage from the coronavirus outbreak, prominent economists and some lawmakers are starting to wrestle with how the government might use its power to tax and spend to mitigate the economic pain.
The attention to fiscal policy reflects the little room remaining for the Federal Reserve to cut interest rates. The complexities of responding to a pandemic and the desire of lawmakers to show they are getting something done in an election year could strengthen the case for a fiscal boost.The attention to fiscal policy reflects the little room remaining for the Federal Reserve to cut interest rates. The complexities of responding to a pandemic and the desire of lawmakers to show they are getting something done in an election year could strengthen the case for a fiscal boost.
Talk of fiscal stimulus is still in the earliest phases, reflecting the suddenness with which signs have emerged that the new coronavirus will hurt the economy. Those who closely track the machinations of Washington believe there will be a meaningful push for some fiscal action if the economic outlook deteriorates.Talk of fiscal stimulus is still in the earliest phases, reflecting the suddenness with which signs have emerged that the new coronavirus will hurt the economy. Those who closely track the machinations of Washington believe there will be a meaningful push for some fiscal action if the economic outlook deteriorates.
The list of reasons that the Federal Reserve should not have cut interest rates on Tuesday is long.
Lower rates will do nothing to address the cause of potential economic distress, namely supply disruptions and halted economic activity caused by the coronavirus outbreak. It comes as the Fed is already low on firepower to offset an economic slump, because of perpetually low interest rates.
But the thinking behind the decision is not complicated. It was a judgment that just because you don’t have the right tools for a job doesn’t mean you shouldn’t use the tools that you do have to try to make things better.
The Fed cannot stop supply chains from being disrupted or certain types of business activity, like travel and tourism, from freezing up. What rate cuts can do, however, is try to help prevent those disruptions from spiraling into a recession.
The global outbreak has caused upheaval in stock markets and disrupted supply chains around the world. But so far, there have been few signs of widespread economic damage, at least in the United States.The global outbreak has caused upheaval in stock markets and disrupted supply chains around the world. But so far, there have been few signs of widespread economic damage, at least in the United States.
Economists say a pandemic could clearly cause a recession in the United States. But for that to happen, the effects would have to spread beyond manufacturing, travel and other sectors directly affected by the disease. The real sign of trouble, said Tara Sinclair, an economist at George Washington University, would be if companies with no direct connection to the virus started reporting a slump in business.Economists say a pandemic could clearly cause a recession in the United States. But for that to happen, the effects would have to spread beyond manufacturing, travel and other sectors directly affected by the disease. The real sign of trouble, said Tara Sinclair, an economist at George Washington University, would be if companies with no direct connection to the virus started reporting a slump in business.
“The key is to watch big macro numbers rather than obsessively watching things tied to virus and supply chains,” Ms. Sinclair said. “If people aren’t getting haircuts anymore, that’s a bad sign.”“The key is to watch big macro numbers rather than obsessively watching things tied to virus and supply chains,” Ms. Sinclair said. “If people aren’t getting haircuts anymore, that’s a bad sign.”
A recession is more than just a dip in gross domestic product. As most economists think of it, a recession involves a cycle that feeds on itself: Job cuts lead to less income, which leads to less spending, which leads to more job cuts.A recession is more than just a dip in gross domestic product. As most economists think of it, a recession involves a cycle that feeds on itself: Job cuts lead to less income, which leads to less spending, which leads to more job cuts.
Some companies have already taken precautions like limiting travel to affected countries or big international conferences. Others have asked employees to stay home because they visited a country with a more serious outbreak.Some companies have already taken precautions like limiting travel to affected countries or big international conferences. Others have asked employees to stay home because they visited a country with a more serious outbreak.
But with new unexplained cases being reported in the United States — and the first domestic death from the illness reported on Saturday — a growing number of American workers could soon be asked to alter their routines, or just stay home.But with new unexplained cases being reported in the United States — and the first domestic death from the illness reported on Saturday — a growing number of American workers could soon be asked to alter their routines, or just stay home.
Exactly how that affects you will depend on many factors, including the generosity of your employer’s benefits and where you live. U.S. workers are less likely to be covered by a paid sick leave policy than those in other developed countries.Exactly how that affects you will depend on many factors, including the generosity of your employer’s benefits and where you live. U.S. workers are less likely to be covered by a paid sick leave policy than those in other developed countries.
Robinhood, a free trading app with more than 10 million users, experienced a systemwide shutdown for a second straight day, leaving many investors angry that they were unable to make trades in a rapidly moving market. The outage was resolved on Tuesday.Robinhood, a free trading app with more than 10 million users, experienced a systemwide shutdown for a second straight day, leaving many investors angry that they were unable to make trades in a rapidly moving market. The outage was resolved on Tuesday.
Foxconn, the Taiwan-based electronics manufacturer and a crucial partner in Apple’s supply chain, said on Tuesday that it was producing at only half its required capacity for this time of the year.Foxconn, the Taiwan-based electronics manufacturer and a crucial partner in Apple’s supply chain, said on Tuesday that it was producing at only half its required capacity for this time of the year.
Late on Monday, Hyatt Hotels withdrew its financial forecasts for 2020, in part because of the impact of travel restrictions imposed by companies since the virus outbreak, saying its ability to assess the impact of the virus “continues to be limited because of quickly changing circumstances and uncertain consumer demand for travel.”Late on Monday, Hyatt Hotels withdrew its financial forecasts for 2020, in part because of the impact of travel restrictions imposed by companies since the virus outbreak, saying its ability to assess the impact of the virus “continues to be limited because of quickly changing circumstances and uncertain consumer demand for travel.”
British Airways canceled 216 flights from London to New York, Italy, France, Germany, Belgium, Austria and Ireland from March 16 to 28. The airline had previously canceled flights to mainland China and reduced service to Italy. Ryanair, the Irish discount airline, canceled a quarter of its flights to and from Italy, from March 17 to April 8.British Airways canceled 216 flights from London to New York, Italy, France, Germany, Belgium, Austria and Ireland from March 16 to 28. The airline had previously canceled flights to mainland China and reduced service to Italy. Ryanair, the Irish discount airline, canceled a quarter of its flights to and from Italy, from March 17 to April 8.
Twitter, which had already closed offices in Japan and South Korea and banned nonessential travel, on Monday encouraged all of its employees in the United States and other countries to work from home. And its chief executive, Jack Dorsey, pulled out of a speaking engagement at South by Southwest, an annual technology conference and music festival scheduled to be held in two weeks in Austin, Tex.Twitter, which had already closed offices in Japan and South Korea and banned nonessential travel, on Monday encouraged all of its employees in the United States and other countries to work from home. And its chief executive, Jack Dorsey, pulled out of a speaking engagement at South by Southwest, an annual technology conference and music festival scheduled to be held in two weeks in Austin, Tex.
Reporting was contributed by Tara Siegel Bernard, Ben Casselman, Geneva Abdul, Kate Conger, Neil Irwin, Alexandra Stevenson, Jeanna Smialek, Raymond Zhong, Kevin Granville, Carlos Tejada, and Jack Ewing. Reporting was contributed by Matt Phillips, Tara Siegel Bernard, Ben Casselman, Geneva Abdul, Kate Conger, Neil Irwin, Alexandra Stevenson, Jeanna Smialek, Raymond Zhong, Kevin Granville, Carlos Tejada, and Jack Ewing.