The old saw used to be that when the U.S. sneezes, the rest of the world catches a cold.
Now, a more apropos adage for market bears may be that when an outbreak of coronavirus grinds the world’s second-largest economy to a halt, the rest of the world catches a recession.
Indeed, recession fears resurfaced on Wall Street last week, even as equity markets stood not far from all-time highs, amid volatile trade that whipsawed mostly on jitters that supply chains and economies could suffer from the spread of the infectious illness that originated in Wuhan, China, known as COVID-19.
“The [coronavirus spread] definitely injects an element of uncertainty into markets for the near term and for the longer term as well,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Analysts at BofA Global Research said the probabilities of a recession have increased and that is reflected in the action in long-bonds like the 10-year Treasury note and the 30-year Treasury bond, which plunged Friday to its lowest rate on record. Investors will flee to the presumed safety of U.S. government bonds, driving yields lower, with the hope of avoiding losses that can derail riskier assets in a selloff.
The 30-year bond yield TMUBMUSD30Y, +0.00% fell 5.2 basis points on Friday to 1.92%, based on Tradeweb data, to an all-time low of 1.89%. The 10-year note yield TMUBMUSD10Y, +0.00% also tumbled below the key level of 1.50%, last trading at 1.475%. Bond yields move in the opposite direction of prices.
BofA said a move for the 10-year below 1.4% could represent a tipping point for the market, one that raises the probability for a recession, particularly if the Federal Reserve continues to hold benchmark rates at the current 1.50-1.75% range.
Here’s how BofA’s analysts put it (see attached chart): “Indeed, breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher…”