TREASURIES – Yields tumble, 10-year approaches record low as coronavirus spreads

 (Updates with market activity, analyst comment)
    By Dhara Ranasinghe, Sujata Rao and Ross Kerber
    Feb 24 (Reuters) - U.S. Treasury yields fell on Monday to
their lowest levels since 2016 as investors sought safety in
government bonds amid fears the coronavirus epidemic could do
more economic damage than predicted.
    The curve inversion between the 3-month and 10-year bond
yields also deepened in what has been seen as a potential
recession signal.
    Investors dumped equities as they perceived 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
    "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 mostly risen until Monday, when the S&P 500
fell around 3%.
    "The bond market has been a little ahead of this," a reason
bond yields did not fall further on Monday, Phifer said.
    As investors sold stocks and rushed for safe-haven assets,
the 10-year Treasury yield was down 11.6 basis
points to 1.3538% after earlier hitting 1.352% - 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 1.811%
, and was down 10.5 basis points at 1.8122% in
afternoon trading on Monday.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 10.7
basis points at 1.2435% -- its lowest since May 2017.
    Speaking at a news conference in Geneva, World Health
Organization Director-General Tedros Adhanom Ghebreyesus said a
sudden increase in coronavirus cases in Italy, Iran and South
Korea were "deeply concerning" but for now authorities were not
seeing an uncontained global spread of the virus or witnessing
widespread serious cases or deaths.
    "The key message that should give all countries hope,
courage and confidence is that this virus can be contained,
indeed there are many countries that have done exactly that," he
said at a news conference.
    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 19 basis points while
the 2-year/10-year curve is inching that way, standing at just
11 basis points, also its flattest since October.
    Negative sentiments rose 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. 
    In U.S. politics the self-avowed democratic socialist Bernie
Sanders dominated the Nevada caucuses on Saturday, leading to
pressure on the stocks of U.S. health insurers who could be
squeezed out under his Medicare for All plan.
    Edward Moya, senior market analyst for brokerage OANDA, said
Sanders' victory likely did not have a broader market impact on
Monday, ahead of more significant state contests next week.
    Even if Sanders emerges as the Democratic nominee, Moya
said, "Wall Street is pretty convinced that Trump would easily
beat Bernie."
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.515        1.5458    -0.013
 Six-month bills               1.45         1.4848    -0.038
 Two-year note                 100-64/256   1.2435    -0.107
 Three-year note               100-134/256  1.1952    -0.116
 Five-year note                100-224/256  1.1917    -0.124
 Seven-year note               101-120/256  1.2779    -0.121
 10-year note                  101-92/256   1.3538    -0.116
 30-year bond                  104-84/256   1.8122    -0.105
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         0.00        -0.75    
 U.S. 3-year dollar swap        -1.25        -0.50    
 U.S. 5-year dollar swap        -2.25         0.00    
 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, Dan Grebler and Cynthia Osterman)

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