Bond Report: 10-year Treasury yield hits three-week low as investors eye coronavirus case count

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U.S. Treasury yields fell Monday as investors eyed the extent of the COVID-19 outbreak’s spread, and bond markets benefited from month-end buying.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +5.85% tumbled 7.7 basis points to a three-week low of 0.667%. The two-year note rate TMUBMUSD02Y, -6.43%  was down 3.1 basis points to 0.226%, its lowest since May 2013. The 30-year bond yield TMUBMUSD30Y, +6.11% slumped 5.5 basis points to 1.277%, a three-week low. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

President Donald Trump said Sunday coronavirus guidelines on social distancing would be extended to the end of April, a reversal from his hopes that the guidelines could be relaxed by Easter on April 12. The lockdown of large segments of the U.S. economy is likely to keep industrial activity at a standstill.

This comes as the number of infections in Western Europe and the U.S. has climbed day by day. The total number of COVID-19 cases globally stands at 755,591 with at least 36,211 deaths, according to Johns Hopkins data.

Still, equities traded higher on expectation that policy makers would be able to offset the economic blow from the coronavirus. The S&P 500 SPX, +3.35% and the Dow Jones Industrial Average DJIA, +3.19% closed sharply higher on Monday.

In particular, investors are awaiting measures by the Fed to provide lending to small businesses after Trump last week signed a $2 trillion fiscal package buttressing the U.S. economy. The bill is directing $454 billion of funds to the Fed, with the expectation that the central bank will leverage up the capital to lend to businesses, states and municipalities.

Treasurys may also have rallied outside of more fundamental economic reasons. Into the end of the month, investors will frequently increase their holdings of government bonds to ensure the maturity of their overall portfolio lines up with their competing index.

See: Stock-index futures mixed as investors keep focus on coronavirus numbers

In other news, the U.K. was downgraded a single notch by Fitch to AA in part due to the coronavirus impact on government revenues.

The British bond market, or gilts, appeared to shrug off that announcement, with the 10-year U.K. government bond yield TMBMKGB-10Y, -9.43% down 2.4 basis points to 0.334%, according to Tradeweb data.

What did market participants say?

“A growing number of those infected and death tolls have pushed markets into another ‘risk-off’ session. As the month-end closes, we should see more fixed-income rebalancing into equity markets, especially in the U.S.,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

Di Galoma said once the bullish impulse from month-end buying gives way, many balanced mutual funds and pension funds will start selling their inflated bond holdings and reallocate into equities.

Read: These two factors may be driving the stock market’s double-digit gains this week, says JP Morgan strategist

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