The Corner

Economy & Business

30-Year Treasury Yields Reflect Long-Term Economic Headwinds

Police officers in front of a cargo container ship at a port in Qingdao, China, in 2018. (Stringer/Reuters)

The purchasing managers’ index (PMI), a key gauge of business activity, has hit its lowest point since 2013. The PMI reading of 49.6 means that U.S. output in goods and services shrunk in February for the first time in six years. “The deterioration was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions,” said the chief business economist of IHS Markit, which released the PMI numbers.

On Friday, the Chinese National Health Commission reported a total of 75,465 cases of coronavirus and 2,236 deaths, with cases rising in regional neighbors Japan and South Korea.

Until today, U.S. markets had performed well despite fears that the virus could disrupt global supply chains and hold back demand in key Asian markets. That changed Friday, when the yield on 30-year U.S. treasuries hit a record low and the S&P 500 stock index was slated to record its first weekly decline since January.

As investors grow bearish on the economy, demand for safe-haven assets such as U.S. government bonds increases. That demand drives the prices of those securities up, which means the yield — or return on investment — decreases.

While similar downward pressure on shorter-dated bonds is normal, since such bonds are subject to short-term economic volatility, the sharp downward turn of long-dated yields indicates that investors expect a protracted drag on the economy.

Markets are concerned not only about the virus but also about the 2020 presidential election. With Democratic candidates Bernie Sanders and Elizabeth Warren advocating sweeping changes to the U.S. economy, fund managers listed the election as their greatest concern in a survey last month.

In February of last year, the yield curve inverted — meaning yields on short-term bonds exceeded those of long-term bonds. Typically, a yield curve inversion indicates a recession is in the offing. However, the U.S. economy continued growing through 2019, and the yield curve stabilized. While it has still not inverted, it is flattening — a worrying sign for the economy.

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