Bond Traders Double Down on Fed Cut Bets in Rate Markets Rally

(Bloomberg) -- U.S. government bond markets saw a rush of buying Thursday that piled up bets on interest-rate cuts amid concern that the coronavirus will damage global growth.

Increasing anxiety over the toll and spread of the virus appears to have contributed to the momentum in trades that took the 10-year yield just shy of 1.50%, to the lowest since Jan. 31. Expectations for further easing by the Federal Reserve ramped up quickly, with fed funds futures at one point pricing in as much as 45 basis points of easing by year-end. A day earlier, the market saw a quarter point cut and 50-50 odds of another.

“Ultimately, it’s a function of growth risks getting priced in,” said TD Securities rates strategist Priya Misra.

The rallies coincided with a more than a 1% slide in the S&P 500 at the day’s weakest levels. Misra said may reflect concerns based on the extent of quarantines and supply-chain disruptions.

“That fear is permeating” the market, she said. “The risk complex has been in this camp that this is transitory and modest and I’d disagree with both.”

Misra also attributed the speed of the Treasury market’s move in part to convexity hedging positions in mortgages. The spillover also showed in inflation markets. The 10-year breakeven -- a gauge of the market’s outlook for the consumer price index over the next decade -- slumped close to its lows so far this year, to 1.62%.

The market’s increasing expectations for more action from the central bank haven’t yet been endorsed by any officials. Fed Vice Chair Richard Clarida Thursday said “the fundamentals in the U.S. are strong,” and it was too soon to judge how the deadly virus might weigh on the economy. At its January meeting, the Fed projected holding rates steady this year after three cuts in 2019.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Debarati Roy, Mark Tannenbaum

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