Interest rates declined precipitously in February as a result of the spread of Covid-19 worldwide. U.S. Treasury rates reached new lows at the end of the month, with the 10-year yield at 1.12%, having fallen some 50 basis points from its peak for the month (Feb. 5). By month end, the market priced in a Fed funds rate cut of 50 basis points (bps), causing the spread between Fed funds and two-year yields to widen to levels reminiscent of the financial crisis.
The dramatic market reaction was based on the fear of a pandemic and the potential economic consequences thereof; risk markets such as equities and high yield bonds suffered substantial sell-offs. Buyers rushed into safe haven assets, the primary beneficiary being the U.S. Treasury market.
Central banks are generally expected to move to even more accommodative stances with respect to monetary policy. Ultimately, however, the depth of the economic consequences of the virus contagion is unknown and will depend on the spread and severity of Covid-19 itself.
U.S. domestic political events may also be making their way into market behavior, with Senator Sanders rising in prominence in the Democratic Party race.
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