Treasuries Regain Ground After Fed Slashes Interest Rates

Following the sharp pullback seen over the past several sessions, treasuries showed a strong move back to the upside during trading on Monday.

Bond prices gave back some ground after an initial jump but climbed to new highs as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 22.3 basis points to 0.728 percent.

With the steep drop on the day, the ten-year yield closed lower for the first time in five sessions but remains well off last Monday’s record lows.

The rebound by Treasuries came as the Federal Reserve took the unusual step of slashing interest rates by 100 basis points on Sunday, just days ahead of its scheduled monetary policy meeting this week.

The Fed lowered the target range for the federal funds rate to zero to 0.25 percent from 1 to 1.25 percent, noting the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the U.S.

The central bank said it expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

In addition to cutting rates, the Fed also announced a new quantitative easing program, revealing plans to increase its holdings of Treasury and mortgage-backed securities by at least $700 billion.

“The Fed’s decision to slash interest rates to near-zero won’t stop the economy falling into a recession, but the package of liquidity-boosting measures will help prevent credit markets seizing up, reducing the risks a deeper downturn,” said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, “We expect the Fed to do whatever it takes to keep markets functioning smoothly, and to announce further QE & forward guidance to support demand should the crisis worsen significantly.”

The drastic moves by the Fed have raised some concerns that central banks around the world will run out of ammunition to deal with a deepening crisis.

In a sign of the economic impact of the outbreak, the New York Fed released a report this morning showing New York manufacturing activity unexpectedly contracted in the month of March.

The New York Fed said its general business conditions index plunged to a negative 21.5 in March from a positive 12.9 in February, with a negative reading indicating a contraction in regional manufacturing activity.

Economists had expected the general business conditions index to show a much more modest decrease and remain positive at 4.0.

The steeper than expected represented the largest point decrease on record and dragged the index down to its lowest level since 2009.

News on the coronavirus front is likely to remain in focus on Tuesday, potentially overshadowing reports on retail sales, industrial production and homebuilder confidence.

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