TREASURIES-Coronavirus fears drive yields lower

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By Kate Duguid

NEW YORK, Feb 20 (Reuters) – Safe-haven demand for Treasury debt drove yields down on Thursday, pushing the 30-year bond yield under 2% to its lowest since September 2019.

The 30-year yield was last down 5.1 basis points at 1.965%, while the 10-year note yield was last down 5 basis points at 1.520%. Bond yields hit session lows earlier in the day, in step with U.S. stock indexes, as investors fretted over the rising number of coronavirus cases in China as well as the potential economic damage from the epidemic.

Some traders attributed the move to a Global Times report that a central Beijing hospital had reported 36 new cases, leading many to fear a potential explosion of infections in the capital.

“It’s a pure risk-off trade,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald. “You’ve seen the airlines hit – the fears of the potential economic impacts (of the coronavirus) are hitting.

“Today we’re approaching 1.50% on 10-years; it just feels like it’s a risk-off trade and it has potential for some legs. Beyond that, it’s definitely the most volatile trading I’ve seen in a bit,” he added.

Demand for the safe-haven asset has persisted even as U.S. economic data has beaten expectations.

“It’s not the data because the data has been tremendous,” said Thomas Simons, money market economist at Jefferies.

The Philadelphia Fed Business Conditions Index for February, which reflects the manufacturing business outlook, was reported at its highest in four years on Thursday, beating expectations.

“The ‘Phase One’ trade deal has cleared the way for a solid increase in new orders and inventories, even if employment fell to the second-lowest mark since 2016. The release comes after a string of decent reads on the domestic economy, with the economic surprise index at a two-year high,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

The Treasury market showed little response to the data.

“The market by and large these days doesn’t seem to react much to economic data unless it is something that really changes the policy narrative,” said Simons.

“We had Fed minutes yesterday that suggested the only thing that will really change the policy narrative is more clarity on coronavirus and a real change in the inflation picture. Neither of things are going to develop overnight and certainly neither of those things have developed over the last 24 hours.” (Reporting by Kate Duguid; Editing by Chris Reese and Dan Grebler)

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