A flight to safety is decimating the stock market and sending the yield on the 10-year U.S. Treasury to a new record low.
At last check investors clamoring to purchase government bonds could get a whopping 0.762% yield on a 10-year Treasury note. The yield had hit a low of 0.66% but has recovered. It was the first time ever the yield dropped below 0.7% and likely not the last. Unlike stocks, bond yields decline as their prices increase.
Investors are rightfully spooked about the coronavirus outbreak as it spreads across the U.S. There are currently 231 cases in the U.S. affecting people in 20 states. Worldwide the virus has infected more than 100,000 and killed 3,412.
With companies issuing earnings warnings, the airline industry poised to lose more than $100 billion and scores of people quarantined, investors are running for the hills. But 10-year Treasury bonds yielding 0.73% aren’t the answer.
There’s no doubt the coronavirus could spark a recession and stocks will continue to tank, but locking your money up for ten years with little in the way of a return will cause irreparable damage. Just look at the Great Recession of 2008 and 2009 for evidence. According to Fidelity Investments, 401 (K) holders who freaked out and moved all their money to cash never recovered a decade later.
That doesn’t mean risk-averse investors have to keep all of their money in stocks. A better option is to maintain a diversified portfolio of stocks and bonds, being mindful of not having a heavy concentration in one area.
For investors who want to take advantage of the stock market, bloodletting opportunities do abound in select areas. Stay at home stocks like Netflix (NASDA:NFLX) and Zoom Video Communications (NASDAQ:ZM) are two examples. Both may benefit if Americans are quarantined.
It’s not clear how bad coronavirus will be and how much impact it’ll have on the global economy, but over the long run it will probably be contained and businesses should get back to normal. Who would have thought at the height of the financial crisis a ten-year bull run would ensue? Those who stayed invested during the Great Recession saw their portfolios nearly triple, according to Fidelity.
Still sounds too risky? A one-year CD at an online bank yields around 2%, much better than the 10-year U.S. Treasury.
U.S. Treasury investors also face the risk the yield could dip further if the Federal Reserve cuts interest rates again.
Last week, the Fed made an emergency 50 basis-point cut in an effort to juice the economy in the wake of coronavirus. Economists polled by Reuters expect the Fed to cut rates by 25 basis points or more at its upcoming policy meeting Mar. 17-18. Some market watchers think the Fed will act a third time in April.
All of that is increasing the odds the Fed hits zero by the summer at the latest. If that happens, 2-year and 5-year yields will turn negative and the 10-year bond could see another decline in the yield.
Coronavirus isn’t going away anytime soon, nor is the volatility in the stock market as the virus spreads. But hiding out in U.S. Treasurys, especially 10-year ones, isn’t going to protect your investment portfolio amid all the carnage.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: March 8, 2020 4:36 PM UTC