Ten year U.S. Treasury bond yields hit a record low Tuesday, while stocks extended their biggest decline in more than two years, as world health officials warned that the coronavirus could escalate into a global pandemic.
Benchmark 10-year not yields touched 1.31%, just below the all-time closing low of 1.325% and a move that extends their one-week slide to around 25 basis points. The previous all-time intra-day low for the notes is 1.318%, which it hit in July of 2016 in the days after Britain voted to leave the European Union.
The move also further inverted the yield between 10-year notes and 3-month Treasury bills, which now sits at 21.5 basis points, the steepest since March of last year. Benchmark 30-year Treasury bonds also hit an all-time low of 1.788% Tuesday.
The CME Group's FedWatch tool, which assigns rate cut odds based on futures prices, suggests investors are pricing in at least a 53% chance of an April rate cut, a move which would lower the Fed's target rate to a range of 1.25% to 1.5%.
The chances of a cut in June, however, have risen to as high as 76%, suggesting investors are fearful that the virus, which has spread to Western Europe and Central Asia, will hobble global economic growth over the first half of the year.
"From a current macro perspective, the U.S. does not need lower interest rates right now," said Ian Shepherdson of Pantheon Macroeconomics. "Growth is steady, the labor market continues to tighten, and core inflation likely will be very close to the target by the middle of spring."
"But this Fed has been chastened by the late 2018 experience, and its clear, if informal, shift to the idea that inflation above target can be tolerated after years of undershoots, suggests that policymakers would be prepared to act if financial conditions tighten excessively."
The bond market moves have also accelerated equity losses, with the Dow Jones Industrial Average falling a further 785 points, following on from yesterday's 1,000-plus point decline, the steepest in at least two years, to take the year-to-date decline to around 4.6%.