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Home > Coronavirus > As the coronavirus spreads, bond markets take notice

As the coronavirus spreads, bond markets take notice

Jan. 24, 2020 by Brandon Koeser and Matt Wolf

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For a while last year, it seemed that yields on U.S. Treasuries were on an upward path as trade tensions with China eased and recession fears calmed. But all that has changed as fears over the outbreak of the coronavirus in China have combined with moderated corporate earnings and continued delays over the Boeing 737 Max to suppress those yields.

On January 21, when the first confirmed case of the coronavirus was reported in the United States, the yield on the 10-year Treasury began a steady march down toward lows not seen since early December 2019.

As news about the coronavirus spread, yields declined…

Although markets got a reprieve on Thursday when the World Health Organization declined to declare the coronavirus a global health emergency, medical professionals are still trying to understand this mystery illness, and it’s hard to know just how big the impact will be.

The World Health Organization has confirmed more than 900 cases globally, including the two in the United States, and 26 deaths — all within the Hubei Province of China.

Already, China’s response has been dramatic. Twelve cities representing 36 million people in the Chinese province of Hubei, which includes Wuhan, are on some level of travel lockdown. Wuhan itself faces the strictest ban: its 11 million residents cannot travel by train, bus, airplane or ferry. Disney Shanghai, which is about 520 miles east of Wuhan, has also closed to help prevent the spread. The government is also building a 1,000-bed special purpose hospital in Hubei specifically designed to treat the virus.

If history has told us one thing, it’s that global markets will be affected if an emergency is declared.

If history has told us one thing, though, it’s that not only domestic markets but also global markets will be affected if this virus is declared to be a global health emergency.

Look no further than the Ebola outbreak starting in early 2014 and continuing through mid-2016 to see how that played out in the global economy. That outbreak eventually took more than 11,000 lives, primarily in West Africa. From the moment the health officials declared the outbreak of the Ebola virus on March 23, 2014, until its end was announced on June 9, 2016, yields on the 10-year Treasury fell from nearly 2.8% to about 1.6%. They then quickly rebounded over the next few months.

The declaration of an outbreak is not as severe as the designation of a full public health emergency, which occurred on August 8, 2014, but it still has a significant impact on public markets.

… echoing the flight to safety that followed the Ebola virus

Then there was the outbreak of the SARS virus in southern China in late 2002 and 2003. In that case, 774 people in 17 countries died. Although the impact on yields was more muted, it still led to lower rates.

… and, to a lesser extent, the SARS virus

In the United States, the impact of a large-scale outbreaks of infectious diseases in foreign countries cannot be minimized, not from a public health perspective, nor from a macroeconomic perspective.

As the global economy becomes increasingly interconnected, so too do the inherent risks of public health events like the coronavirus as it continues to spread around the world.

If the positive news surrounding retail sales and consumer confidence in recent months provided tailwinds to U.S. interest rates, the moderation of corporate earnings and the spread of the coronavirus around the world will be the new headwind as interest rates can be expected to decline further.

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Filed Under: Coronavirus, Financial Services, Health Care Tagged With: coronavirus, Covid-19, interest rates, World Health Organization

About Brandon Koeser

@brandonkoeser

Brandon Koeser is a senior manager at RSM US. In May 2019, he was selected as a senior analyst in RSM’s cutting-edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. Koeser's focus is on the financial services industry.

About Matt Wolf

@MattWolfHC

Matt leads RSM’s health care valuation consulting group. In this capacity, Matt helps health care clients evaluate mergers, acquisitions, joint ventures, and other growth strategies.

In January 2018, Matt was selected as a senior analyst RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Matt’s focus is the health care and life sciences space.

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