US 10-yr yield tests 1.32% all-time low

Coronapanic continued to spread yesterday, mainly during US trading hours and with stocks ending up being the biggest victims. US indices lost another 3%. The US CDC (Centers for Disease Control and Prevention) warned that they expect a wider spread of the virus in the US and that it is preparing for a potential pandemic. The Trump administration tried to downplay the impact, but couldn’t prevent the S&P 500 from falling through first support in the 3200-area. Next support kicks in around 3028 (July/Sep 2019 highs) and 2994 (38% retracement from “Powell put rally” since end 2018). For once, moves on stock markets because of the risk-off theme were disproportionally large compared to other markets. Gold prices stabilized while core bonds ended way off their best intraday levels. The German yield curve bull flattened with yields 1.6 bps (2-yr) to 3.7 bps (30-yr) lower. Peripheral yield spreads widened by up to 5 bps with Greece (+9 bps) underperforming. The US yield curve bull steepened with yields declining by 2.5 bps (2-yr) to 0.9 bps (30-yr). The US 10-yr yield bounced off the 2016 all-time low (1.32%). The curve move strengthens market thinking that the Fed will be called to action by June; a view which isn’t currently shared by Fed governors. Vice chair Clarida joined the chorus of Fed members who admit that the coronavirus is a negative risk to the economy, but at this stage doesn’t alter his expected Fed funds rate path. The US 2-yr Note auction went weak. A sign that sufficient bad news/Fed action is discounted by now or a coincidence with some investors side-lined because of sharp market moves?

Losses on Asian stock markets remain limited to 1% this morning. Other markets show signs of relative calm as well. European indices are nevertheless set to open softer and risk facing additional selling pressure with the number and geographical spreading of corona cases expanding. The EuroStoxx 50 could lose the 3570/3600 support area, paving the way for additional losses from a technical point of view towards the high 3200-area. While core bonds obviously already took quite a large advantage on the corona trading theme, it’s also hard to see them lose significant ground in case of prolonged stock market weakness. From a technical point of view, Bunds have room to outperform US Treasuries. Today’s eco calendar is extremely thin apart from some second tier data and ECB speeches. Corona/risk sentiment will continue running the show.

Technically: the Chinese coronavirus took markets since the end of January hostage via risk aversion, pulling core bond yields lower. The Chinese return to trading after Lunar NY holidays temporarily ended the decline, but the rapid spreading outside of China caused fresh stress across markets. The US 10-yr yield tested the all-time low of 1.32% while the German 10-yr yield lost intermediate support around -0.41%/-0.44%.

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