TREASURIES – Yields tumble, curve inversion deepens as coronavirus spreads

    By Dhara Ranasinghe, Sujata Rao and Ross Kerber
    Feb 24 (Reuters) - U.S. 10-year government borrowing costs
fell on Monday to their lowest levels since 2016 as more
coronavirus cases were reported internationally, raising fears
the outbreak could do significantly more economic damage than
    The curve inversion between the 3-month and 10-year bond
yields also deepened in what has been seen as a potential
recession signal.
    The moves came as investors dumped shares and fled for the
safety of bonds, perceiving a risk that China's coronavirus
outbreak will grow into a pandemic, with disruptive and deadly
consequences around the world, as the number of infections rose
sharply in South Korea, Italy and Iran.
    "It's a flight to quality," said Ellis Phifer, market
strategist for Raymond James in Memphis, Tenn. He noted that
bond yields have fallen sharply since late last year, when the
10-year was approaching a 2% yield. In contrast, U.S. equities
indexes had  been relatively steady until Monday, when they fell
nearly 3%.
    "The bond market has been a little ahead of this," a reason
bond yields did not fall further, Phifer said.
    As investors sold stocks and rushed for safe-haven assets,
the 10-year Treasury yield fell 10 basis points to
1.3705%, after earlier touching 1.359% - its lowest since the
summer of 2016. Its all-time low of 1.321% was reached on July
6, 2016.
    The 30-year Treasury yield touched a record low at 1.813%
, and was down 9.4 basis points 1.8235%.
    Italy is racing to contain the biggest outbreak of
coronavirus in Europe, sealing off the worst-affected towns and
banning public events in much of the north as a fourth patient
died of the illness.
    Justin Onuekwusi, a portfolio manager at Legal & General
Investment Management, said that while the U.S. economy has been
relatively robust so far, "The U.S. Treasury market is pricing
that the world economy is going to be flirting with sub-2%
    World growth falling below 2% is generally considered
equivalent to recession, taking into account population growth
and poor countries' need for faster expansion.
    Focus is likely to turn to the yield curve - the gap between
short- and long-dated bond yields. Curve inversion, when
short-dated borrowing costs are higher than those further out,
is considered a potential gauge of U.S. recession.
    The 3-month/10 year curve was at its most inverted since
October at negative 17 basis points while
the 2-year/10-year curve is inching that way, standing at just
11 basis points, the flattest since last October.
    Money markets have deepened their bets on interest rate cuts
by the Federal Reserve, now roughly pricing a 25 basis-point cut
in June. 
    The bets picked up steam after purchasing managers' index
(PMI) surveys on Friday showed U.S. business activity in both
the manufacturing and services sectors stalled in February, the
latter slipping to its lowest since 2013.
    "The shock contraction in the U.S. service sector brought
home how close we might be to recession because of the
coronavirus," London and Capital Group told clients. 
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 9.2
basis points at 1.2578% in morning trading.
      February 24 Monday 10:30AM New York / 1530 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.51         1.5407    -0.018
 Six-month bills               1.45         1.4848    -0.038
 Two-year note                 100-57/256   1.2578    -0.092
 Three-year note               100-122/256  1.2112    -0.100
 Five-year note                100-198/256  1.2129    -0.103
 Seven-year note               101-88/256   1.2966    -0.102
 10-year note                  101-52/256   1.3705    -0.100
 30-year bond                  104-16/256   1.8235    -0.094
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         0.25        -0.50    
 U.S. 3-year dollar swap        -1.25        -0.50    
 U.S. 5-year dollar swap        -2.50        -0.25    
 U.S. 10-year dollar swap       -8.00        -0.25    
 U.S. 30-year dollar swap      -38.50        -0.50    

 (Reporting by Dhara Ranasinghe, Sujata Rao and Ross Kerber;
Editing by Giles Elgood and Dan Grebler)

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