Daily Market Color

Treasury Yields Continue to Fall as Virus Concerns Spread


Fresh concerns about the impact of the coronavirus are sweeping markets. There has been a recent spike in cases outside of China and new companies are reporting potential impacts on business. Investors are re-assuming a risk-off stance, flocking to haven assets like US Treasuries. The 30-year Treasury was 1 basis point away from its all-time low. Last August, Treasuries rallied due to recession fears and trade tensions. The 30-year bounced back to 2.44% in November and began sliding back down in January when news of the outbreak broke. The International Air Transport Association expects the first decline in passenger demand for flights in 11 years, as airlines continue to postpone flights. China reports that the virus has been contained, but South Korea has recently reported a spike in infections. The current 10-year Treasury is at 1.476%.



The 3m LIBOR/OIS spread has tightened. Credit risk has declined, and the spread is two standard deviations tighter than Bloomberg’s fair value model. The Fed announcement that it will make efforts to purchase more T-bills increased bank reserves, leading to reduced credit and liquidity risk for panel banks. The LIBOR/OIS spread has followed the spread between 1m and 3m LIBOR. The 1m forward spread for 3s1s has turned up slightly in the past week, signaling that it may have bottomed due to the priced in liquidity.



Day ahead. Existing home sales data and February Markit PMIs will be released this morning. Economists forecast that January numbers will hold steady after the 3.6% jump in December. Dallas Fed President Robert Kaplan, Fed Governor Lael Brainard, Atlanta Fed President Raphael Bostic, Fed Vice Chair Richard Clarida, and Cleveland Fed President Loretta Mester are all scheduled to speak today.


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