This is telling us something big. It means there’s a lot of concern that the global health and economic situation is going to get worse before it gets better. And it means the Trump administration and Congress are going to have to play a bigger role.
Here are the three key takeaways:
1. There’s still a lot of concern about the economy because of the coronavirus. The coronavirus is quickly morphing into the biggest threat to the global economy since the 2008 financial crisis. No one really knows how many people are going to get the virus, how deadly it will be or how many places will be affected. The news is changing daily, and uncertainty tends to drive markets down and undermine confidence. When investors are scared, they run into the arms of the 10-year U.S. Treasury bond, and they don’t demand much in return.
Supply chains have already been disrupted. People are canceling flights and cruises. The big question is whether the coronavirus will also cause American consumers to pull back sharply on spending, which is the main driver of the U.S. economy. If a lot of Americans stay home, restaurants, stores, theaters, conference venues and more will suffer. Tuesday’s 10-year Treasury bond milestone is a signal that there’s a lot of fear that this situation could get a lot worse than economists initially expected.
The drop was also probably driven by the Federal Reserve, which took the highly unusual step of an emergency interest rate cut Tuesday. The Fed lowered the benchmark U.S. rate to just under 1.25 percent, down from about 1.75 percent. The move was meant to reassure investors and consumers that the Fed will do what’s needed to support the economy, but bond investors think that won’t be enough. Interest rates are likely to go lower. JPMorgan now predicts a 50 percent chance that U.S. interest rates return to zero this year.
2. Wall Street is shouting at the White House and Congress to get their act together. When the yield fell below 1 percent, a number of experts tweeted that this was a clear call for the White House and Congress to take more decisive action — probably even more than the $7.5 billion emergency funding package that’s already in the works.
Economists have pointed out for days that a Fed rate cut can go only so far. It doesn’t matter how low interest rates go. If Americans are worried about catching the coronavirus, they aren’t going to leave their homes to spend a lot of money. What the nation really needs is assurance that the federal government has a handle on the situation and is taking steps to contain the virus, including widespread testing.
Here’s how Julia Coronado, a former Fed economist and founder of MacroPolicy Perspectives, described it to me today: “We need to know the extent of the virus in the U.S. We are not even doing broad-based testing. We don’t know where this is or who has it. The uncertainty is so high right now about the most basic things, and that’s weighing on the economy.”
Another major area of concern is that about a quarter of U.S. workers have no paid sick leave, and in the service sector, including fast food and hospitality companies, that figure rises to nearly half of the workforce. Access to paid sick leave allows people to take time off without losing money — and research has shown it tends to make flu rates plummet when people are encouraged to stay home, as The Washington Post’s Christopher Ingraham points out.
3. There’s big demand for “safe” U.S. assets. The movements of the 10-year U.S. Treasury bond are also telling us something about the global economy. Investors around the world tend to run to U.S. government bonds anytime there is a crisis, because U.S. assets are easily tradable and the U.S. government is widely viewed as unlikely to default.
While there is a real risk of a global recession — or even a U.S. one — if the situation worsens, the United States is widely viewed as one of the last or least likely to fall. That’s mainly because the U.S. economy was in pretty good shape at the start of the year. Unemployment remains at a half-century low, with most people who want a job able to get one. Wages were rising and confidence was high. That gives the United States more of a cushion heading into this turbulence than Europe and parts of Asia, which were already struggling to revive their economies before the coronavirus hit.
“If you’re looking for a port in the storm, the U.S. is still the safe haven,” said Lindsey Piegza, chief economist for Stifel Financial. “We are continuing to see those capital flows come into the U.S., which is exacerbating downward pressure on bond yields.”