Coronavirus outbreak intensifies recession worries

We 'haven't seen the end of the global fallout'

The 10-year Treasury yield sank to a record low Tuesday as concern about economic damage from the growing coronavirus outbreak steered investors away from stocks and into safe-haven assets like U.S. government securities.

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Tuesday’s stampede into Treasurys pushed the yield on the 10-year note down by as many as 5.6 basis points to 1.321 percent, its lowest on record.

“Markets are starting to price in the impact of the coronavirus on the global economy but there remain significant uncertainties,” Mohamed El-Erian, chief economic adviser at Allianz, told FOX Business. “These uncertainties relate to more than the impact of the virus, including how quickly it can be contained and its adverse effects reversed.”

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The outbreak, which originated in Wuhan, China, has caused the lockdown of hundreds of millions of people in the country, paralyzing supply chains and forcing companies to temporarily shutter or reduce operations.

The disruption so far is expected to slow U.S. first-quarter gross domestic product growth to 1 percent, after which it may gain momentum to expand at 1.8 percent, 1.5 percent and 1.8 percent in the second, third and fourth quarters, respectively, according to economists at JPMorgan Chase.

Some investors, however, don't think the U.S. economy is out of the woods yet, and the virus's spread outside of China, with cases in South Korea, Europe and Iran, has heightened worries.

Sri Kumar, president of the Santa Monica, California-based Sri-Kumar Global Strategies, told FOX Business that the 10-year yield’s plunge to record lows indicates that we “haven't seen the end of the global fallout” from the coronavirus and that a U.S. recession is on the horizon. He pointed to the action in the yield curve as an indicator of a looming downturn.

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The spread between the 3-month and 10-year yields, a widely-watched recession gauge, inverted last March and turned positive over the summer before sliding back into the red this year. It’s now deeply negative, and according to Kumar, it signals that a “recession is coming.”

The logic behind that view is fairly straightforward. During periods of growth, investors demand a higher yield on long-term notes since economic conditions are more difficult to predict over lengthier time frames than in the present or near future. On a graph, the trend appears as a line curving upward, with the yield rising with each additional block of time.

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When that curve starts to flatline or bend downward, it indicates investors are more concerned about near-term conditions, signaling an economic contraction is likelier.

But that’s not the only sign of pending malaise.

The spread between the U.S. 2-year and 10-year yields briefly went negative in August, sparking recession fears on Wall Street as such an event has occurred ahead of every U.S. downturn for the past 50 years.

However, it quickly turned positive and then steepened, causing many to declare that a recession had been avoided. The spread widened to 13 basis points on Tuesday amid rising speculation that the Federal Reserve would cut interest rates to buoy the economy.

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“An inversion of the yield curve followed by the yield spread going positive and the yield curve steepening is exactly the way it has happened in the past two recessions,” Kumar said. “So that does not give me enough comfort.”