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On February 28, Beijing time, growing concerns about the outbreak prompted traders to start betting that interest rates could return to the era of the financial crisis.
Short term Treasury yields are falling sharply, with two-year Treasury yields plummeting by more than 20 basis points since February 21, expected to record one of the biggest weekly declines since 2008. In 2008, the global financial system was in a deep crisis, with two-year bond yields plummeting 51 basis points.
At the same time, traders now expect the fed to cut interest rates by 75 basis points this year, and some are even guarding against the possibility that Fed chairman Jerome Powell needs to cut the US benchmark interest rate to zero.
The moves sent markets into a state of tension, with traders describing the early morning trading scene in New York, from widespread chaos to a calm acceptance of the fact that the United States has finally joined the global low interest club. This week, the spread of the coronavirus has been driving investors to buy Treasuries as a safe haven, with 10-year and 30-year Treasury rates dropping to unprecedented levels as stocks plummet.
US Treasuries "represent a real recession, not a temporary credit access problem," said Chris bury, a partner at minimax capital and former head of interest rate trading at Jefferies. "The market has adapted to the Fed's response mechanism to provide loose credit, but this time it will not solve the problem."
At the short end of the curve, falling yields indicate a growing belief that the Fed will be forced to act to contain the impact of the virus on the economy. The spread of the virus is disrupting global supply chains and hitting consumer demand in some large economies.
As concerns about the spread of the epidemic spread through the market, the overnight interest rate on Thursday's fed meeting date fell sharply, fully reflecting the possibility of a 25 basis point cut as early as April. European dollar options, which reflect a mid year decline in the federal funds rate to around zero, also capture investor demand, which means the Fed needs to cut interest rates by 50 basis points at three meetings through June.
The last time the Fed cut its target interest rate range was in October, when it lowered it to 1.50% - 1.75%. In the past few days, the real federal funds rate has been 1.58%.
The yield on the highly sensitive two-year Treasury note fell to 1.03% on Thursday. The lowest yield on record was 0.14% in September 2011.
"When risk markets are volatile, market participants are looking for liquidity, and nominal treasury bonds are the most liquid product on the planet," said Tim Magnusson of Garda capital. "Is it cheap to buy at this price? No, but if you guard against risk, then the yield of national debt is not as important as capital preservation. "
For long-term treasury bonds with record low yields, traders are focused on integer targets, as investors may choose to make profits here, hindering the rise of treasury bonds. For 10-year bonds, the yield is 1.25%, while for 30-year bonds, it is 1.75%. Both levels were breached on Thursday, and yields bounced back quickly.
Risk tip: We hereby remind you that there is a high risk in foreign exchange margin trading, which may not be suitable for every investor. Before applying for and entering into any foreign exchange margin trading and difference contract, you should carefully consider your objectives, financial situation, needs and experience level, And when necessary, consult an independent professional consultant. The function of foreign exchange margin and CFD leverage is to enlarge your profits and losses. Before formal trading, please make sure you fully understand the risks, including that the loss of principal may be far higher than your initial investment. If you can't bear the loss, please don't invest rashly, and decide the transaction after you fully understand the potential risks.
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