NEW YORK (Reuters) - U.S. government bonds yields fell on Monday morning but remained off the session lows plumbed in overnight trade after the Federal Reserve announced that it would slash interest rates near zero and pledged billions of dollars in asset purchases to bolster the global economy as the coronavirus hits economic activity.
The Fed and global central banks acted aggressively on Sunday in a move reminiscent of the sweeping steps taken just over a decade ago to fight a meltdown of the global financial system. In addition to the rate cut and asset purchases of more than $700 billion - of which $40 billion were planned for Monday - the Fed and other major foreign central banks also cut pricing on their swap lines to make it easier to provide dollars to financial institutions around the world facing stress in credit markets.
The benchmark 10-year Treasury yield, which is reflective of investors’ long-term views of the health of the economy, was last down 15.4 basis points to 0.800% in mid-morning trade. The two-year yield, which reflects expectations of interest rate cuts, fell more slowly than the 10-year, down 10.2 basis points to 0.392%, flattening the yield curve by 4.6 basis points.
Some investors were surprised by the subdued move in yields following the Fed’s announcement.
“The glib answer is that ‘this was already priced in’ – and to some extent the rate cut and eventual return to QE were anticipated,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
“Why aren’t (two-years) at 0 basis points and (10-years) at 25 basis points? While we ultimately expect both of those levels to eventually be breached, for the time being there is an underlying reluctance to press longer rates lower given the experience of last week. The counterintuitive sell-off that characterized the last several trading sessions has understandably left investors wary that another round of de-risking in 10s and 30s as investors prefer to hold cash and very front-end securities.”
Also on Monday, data showed manufacturing activity in New York state plunged in March by the most on record to its lowest level since 2009, offering an early glimpse of the coronavirus’ damaging impact on the U.S. economy. The report from the New York Fed also showed that manufacturers’ optimism about the future was the lowest it has been since the financial crisis.
The yield on the 30-year bond was down 13.6 basis points to 1.431%.
Reporting by Kate Duguid; Editing by Dan Grebler