Contagion concerns about the coronavirus - TDS

Analysts at TD Securities have explained that the Contagion concerns about the coronavirus resulted in a classic flight to quality trade over the past week, with the S&P lower by 3% and 10y rates lower by 21bp.

Key quotes

"There remains substantial uncertainty about the virulence and transmission of the virus, and incoming news should keep markets on edge."

"Coronavirus impacts markets through two channels — directly via Chinese growth (and hence global growth) and indirectly via a tightening in financial conditions. While the information to date doesn't suggest a global pandemic with significant growth implications, many questions persist."

"One could argue that the market reaction so far to the coronavirus has been bigger than past outbreaks. However, it is difficult to use historical episodes to gauge the impact of a potential coronavirus epidemic on the economy and markets."

"Each epidemic had different rates of transmission. Further, there were other significant macro developments that impacted markets at the time. Nevertheless, many of these episodes resulted in a negative impact on regional growth and a temporary risk-off reaction."

"We took off our long 10y Treasury position at 1.6% as the risk-reward is no longer attractive given an uncertain headline-driven world. However, Treasuries remain a risk-off hedge and should benefit from more convexity receiving flows. We think that any further risk-off moves should be accompanied by a steeper 5s30s curve as the market should reprice for more Fed rate cuts."