TREASURIES-Two-year yield hits 7-year low after Fed stimulus

(New throughout, updates prices, yields, market activity and comments)

By Kate Duguid

NEW YORK, March 23 (Reuters) – Treasury yields fell on Monday, with the two-year yield falling to a seven-year low, as investors kept buying safe-haven assets like government bonds even after the Federal Reserve announced enormous stimulus measures to combat the blow dealt to the U.S. economy by the coronavirus pandemic.

The central bank said it would backstop an unprecedented range of credit for households, small businesses and major employers in an effort to offset “severe disruptions” to the economy caused by the outbreak.

But investors remained cautious despite the announcement. The two-year yield, which is particularly sensitive to changes in monetary policy, fell to its lowest since May 2013 at 0.234%. It had since retraced some of that move and was last trading down 7.4 basis points to 0.292%.

“At the end of the day, the Fed’s injections announced Monday are designed to backstop liquidity in market functioning but cannot avert the economic calamity that’s already underway,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

The benchmark 10-year yield fell, last down 19.9 basis points at 0.739%. The level to watch for the benchmark yield, wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, is 1.27%, a high broached last week, “as a metric for whether the Fed’s actions will be able to hit its price mandate on a sustainable basis in the 2020s.”

The long bond was down 25.9 basis points to 1.303%. At the long end of the curve, yields remained well above the all-time lows plumbed on March 9.

“It really is just trying to make sure markets work and companies and municipalities can access markets when needed, but that doesn’t mean layoffs aren’t coming, it doesn’t mean that a recession is not coming. And if you’re the equity market, it’s really hard to rally even on that news.”

A Reuters poll of economists estimated initial jobless claims rose an astounding 1 million last week, and some believe the number could be higher.

Nearly a third of the U.S. population is now subject to rules shuttering non-essential businesses and discouraging people from leaving their homes, to help slow the spread of the virus. Hundreds of thousands of people have already filed for unemployment insurance in California alone, the state’s governor said at the weekend, and many analysts are projecting declines in economic output next quarter that are far worse than the steepest drop during the Great Recession. (Reporting by Kate Duguid Editing by Chizu Nomiyama, Tom Brown and David Gregorio)

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