US two-year yield drops to lowest since July 2016

The yield on the US two-year Treasury note fell to a 3.5-year low on Tuesday as the US Federal Reserve (Fed) delivered an emergency rate cut to contain the economic fallout from the coronavirus outbreak in the US and other parts of the world. 

The two-year dropped from 0.91% to 0.616% to hit the lowest level since July 2016, before closing the day at 0.697%. The 10-year yield also fell to a record low of 0.91%. 

The Fed cut borrowing costs by 50 basis points, its biggest single cut in more than a decade, bringing the interest rate down to a 1 percent to 1.25% range. The US stock markets cheered the rate cut for about 15 minutes before turning lower, The S&P 500 index closed out Tuesday with a 2.81% loss. 

Wall Street likely took the rate cut as a sign of panic. "The downside of an emergency rate cut is, of course, that investors see this as an emergency," Jeroen Blokland, Portfolio Manager for the Robeco Multi-Asset funds, Robeco ONE and Robeco Pension Return Portfolio, tweeted. 

Also, there is general consensus in the market that rate cuts wouldn't stop viruses or mitigate demand and supply damage caused due to people not being able to leave their homes. “We do recognize that a rate cut cannot reduce the rate of infection, it won’t fix a broken supply chain. We get that — we don’t think we have all the answers,” Fed's Chairman Powell said.

That said, markets may continue to speculate about further easing, keeping yields under pressure as the number of confirmed coronavirus cases outside China continue to rise.