Will Coronavirus Risk Influence Today’s Fed Meeting?

The Federal Reserve is expected to leave interest rates unchanged in today’s policy announcement, but the market is repricing yields lower as the crowd embraces safe-haven Treasuries anew as concerns mount that the worst is yet to come for the spreading coronavirus.

Earlier this month, before the virus news roiled markets and unsettled economic expectations, the benchmark 10-year Treasury yield appeared to be on a gradual upward glide path. But the outbreak of the coronavirus in China has upended the benchmark rate’s rising trend and reversed the previously increase in Treasury market inflation expectations. (Bond prices are inversely related with yields and so higher prices results in lower yields.)

The question is whether the recent downturn in yields is temporary, born of virus-related worries? Or is a new phase of falling yields in store for the months ahead—a decline that’s driven by more than virus risk?

The short answer: it’s too soon to know. Much depends on how the rapidly evolving virus news unfolds in the weeks ahead. Meantime, here’s a quick review of key Treasury yields and the market’s inflation expectations ahead of today’s Federal Reserve announcement on monetary policy (2:00 pm Eastern) and subsequent press conference (2:30 pm Eastern).

Let’s start by noting that Fed funds futures are pricing in a roughly 90% probability that the central bank will leave its current 1.50%-to-1.75% target for rate unchanged today, based on CME data. In fact, the futures market is anticipating that the current target rate will likely hold steady through July, which is to say that the probability for no change is priced above 50% through that meeting.

The outlook for Fed policy is stable at the moment, but sentiment in the Treasury market overall has shifted substantially in recent days. Notably, the 10-year yield’s gently rising trend has faded. It will be telling if the yield’s 50-day average falls below the 100-day average in the days ahead—a sign that would suggest the market is anticipating even lower rates.

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