Investors have piled into government bonds, sending the yield on the US benchmark Treasury below a key level as concerns over the impact of the coronavirus on the global economy drip back into the market.
Sovereign bonds rallied alongside other traditional haven assets including gold on Friday, as investors turned to areas of the market prized for their relative safety in times of economic stress. Stocks were set to record their first weekly declines this month.
A cluster of cases in Beijing and a jump in the number diagnosed in South Korea has unnerved investors and led some to reconsider the possible disruption from the disease, analysts said.
On Friday, the yield on the benchmark US 10-year Treasury fell as much as 5 basis points to trade below 1.5 per cent, its lowest level since September.
Bonds across the Asia-Pacific region also rallied. Yields, which move inversely to prices, on 10-year Australian bonds dropped 6 basis points to 0.934 per cent and those on the equivalent South Korean securities fell 8 bps to 1.416 per cent. Yields on 10-year Chinese sovereign bonds dropped 3 bps to 2.841 per cent.
Chinese bonds have dropped to four-year lows in response to the outbreak, with some investors predicting they could push lower as Beijing seeks to mitigate the impact of measures to contain the virus. On Friday analysts at Nomura wrote in a note that they expected yields on China’s 10-year sovereign bonds to decline further, “possibly revisiting the 2016 lows of 2.6 to 2.65 per cent”.
Other traditional safe assets gained, with gold rising another 1 per cent to trade at $1,635 a troy ounce, its highest level in more than seven years.
European stocks recovered most of their early losses to trade marginally down on the day, while futures pointed to declines of 0.4 per cent for the S&P 500 when Wall Street opens. Asian stocks largely fell.
Sentiment in Europe was boosted by the release of surveys that showed activity in the eurozone’s manufacturing sector has mostly held up in the face of the disruption emanating from China.
“The small increase in the eurozone composite PMI was a big surprise. This should at least temporarily put to bed worries over an imminent recession in Europe,” said Oliver Rakau, chief German economist at Oxford Economics. Still, he warned that “the fragility of global supply chains means that even small disruptions in China could spell large repercussions for Europe down the line”.
The coronavirus has disrupted the Chinese economy, and its impact is spreading around the world, leading to a stream of cautious outlooks from multinationals. Investors in the stock markets have largely shrugged off the potential disruption as they count on central bank support, sending US and European equities to multiple records even as the world’s second-largest economy creaks under a simultaneous demand and supply shock.
That bullish sentiment has ground to a halt over the past two trading sessions though. US stocks endured a volatile session on Thursday, at one point tumbling more than 1 per cent in a matter of minutes before recovering to close modestly lower.
The MSCI index tracking global stock markets is 0.6 per cent lower for the week, on course to notch its first weekly decline of the month.
Hugh Gimber, a strategist at JPMorgan Asset Management, said the optimism in stock markets “suggests that investors remain confident that any slowdown in growth will be met with a corresponding bounce back in the quarters ahead”.
“Support from central banks makes it difficult to become overly gloomy on the outlook, but the inherent uncertainties with the spread of this virus emphasise the importance of a well-diversified portfolio,” he added.
