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U.S. Treasury Yields Lower After Fed Cuts -- Update

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03/16/2020 | 04:19pm EDT

By Sebastian Pellejero

U.S. government bond yields slid sharply in another tumultuous trading session on Monday after the Federal Reserve slashed its benchmark interest rate to near zero in an effort to fight shocks from the novel coronavirus.

After falling as low as 0.635% in overnight trading, the yield on the benchmark 10-year Treasury note bounced as high as 0.858% before closing at 0.722%, according to Tradeweb, compared with 0.946% Friday. That still made for the largest one-day decline since March 2009. Yields fall when bond prices rise.

The 30-year Treasury yield followed a similar pattern. After the Fed cut rates and announced a $700 billion asset-purchase package Sunday night, the 30-year yield fell as low as 1.253% before recently rebounding to close at 1.319%, still down from Friday's close of 1.541%.

Some analysts said with interest rates near zero, it could take some time before the 10-year breaks out of its recent range below 1%, particularly as the Fed buys bonds and the economy teeters. Treasury yields have been unusually volatile in recent sessions, reflecting uncertainty brought on by the coronavirus and thinning liquidity in what is normally one of the world's most smoothly functioning markets.

Though investors typically buy Treasurys when they are selling riskier assets like stocks, that pattern has been disrupted over the past week, as some fund managers dump Treasurys to raise cash. Along with boosting the economy, the Fed is trying to improve liquidity in Treasurys, which play a critical role in the global financial system.

Kenneth Harris, senior portfolio manager at Segall Bryant & Hamill, said trading of Treasurys had improved a little Monday from last week, though conditions were still worse than normal. Dislocations in the market made it difficult to trade corporate bonds, he said, since those bonds are typically priced in relation to Treasurys.

Bonds issued by some of the largest U.S. banks fell slightly on Monday after the Fed's announcement. Goldman Sachs Group, Inc. bonds due in 2025 fell more than 2 cents on the dollar, to 99.816 cents, while Bank of America Corp. bonds due that same year fell more than a cent, to 100.807, according to MarketAxess.

Research firm CreditSights estimates that moves by the Fed on Sunday will free up between $400 and $600 billion in bank capital to bolster their ability to lend during the pandemic. The eight largest U.S. banks have halted stock buybacks for the second quarter in an effort to preserve capital.

Analysts are still questioning whether the Fed's actions will be enough to stem any economic hit from the virus.

"While we believe the measures will be helpful in addressing recent liquidity issues in markets and giving banks greater flexibility in addressing client funding needs, the overall economic impact at this point remains unclear," said Richard Ramsden, analyst at Goldman Sachs, in a note to clients.

The annual cost of protecting against a default of $10 million in debt backed by major banks through credit default swaps more than tripled this year to at least $102,000, according to data from IHS Markit.

Meanwhile, speculative-grade corporate bonds tumbled anew. The iShares iBoxx $ High Yield Corporate Bond ETF, or HYG, fell 5.5%, its large decline since October 2008, to 75.65, while the SPDR Bloomberg Barclays High Yield Bond ETF fell 5.76% to 93.47, according to FactSet.

Some analysts expect the volatility in speculative-grade assets to continue, as investors assess the virus's hit to the economy.

"We're not going to be able to see the high-yield market reaccelerate until we have clarity on the economic outlook, which will take several weeks," said Frances Donald, chief economist at Manulife Investment Management. "This isn't a market that's been fixed overnight by the Fed's announcement."

The U.S. dollar also reversed an early fall, with the WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, recently down 0.13%. Lower rates tend to make the dollar less attractive to investors.

Sam Goldfarb contributed to this article.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com

 

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