March 2020 – Bond Market Review

Financial markets experienced significant turbulence during the month of February, driven by a high level of uncertainty about the impact of coronavirus on global economic growth. We believe this was further exacerbated by rising US political uncertainty ahead of this year’s presidential election. The US Treasury market was particularly volatile during the month, amid a global flight to quality. Meanwhile, the S&P 500 index declined more than 8% in the month. There are still many unknowns about the coronavirus including how widespread it will become, how long it will take to contain the virus, and the actual impact on economic activity. We expect that the coronavirus will cause a slowdown in global economic growth but believe a longer-term recovery is likely. Efforts to contain the virus will cause supply chain disruptions for many companies and put corporate cash flows and earnings at risk. However, we anticipate an ongoing collective global monetary and fiscal response if global supply chain disruption and/or the economic slowdown is prolonged.

On March 3, the Federal Reserve made a surprise intra-meeting fed funds rate cut of 50 basis points, to a new range of 1.00-1.25%, its biggest single cut in more than a decade. The decision was unanimous. The next Federal Open Market Committee (FOMC) meeting will be held March 17-18. US economic fundamentals remain intact (tight labor market, high level of consumer confidence, strong housing market, etc.) but in light of the recent tightening in financial market conditions, we believe the probability of another rate cut later this month is high. The implied probability of additional monetary easing, based on fed funds futures prices, remains high.

Treasury yields declined meaningfully in February and the curve remained inverted. At month-end, the yield on 10-year Treasuries was nearly 12 basis points below the yield on 3-month T-bills. The yield on 2-year Treasuries was 35 basis points below the yield on 3-month T-bills at month-end. During the month, the yield on 2-year Treasuries declined 40 basis points to 0.91%, while the yield on 10-year Treasuries declined nearly 36 basis points to a record low of 1.15%. The movement in yields was largely driven by fears about the coronavirus and its potential impact on global economic growth and inflation expectations.