TREASURIES-Virus concerns stoke buying; 2-year yield below 1% for first time since 2016

By Ross Kerber and Dhara Ranasinghe

(Recasts and updates with market activity, analyst comment) By Ross Kerber and Dhara Ranasinghe BOSTON / LONDON, Feb 28 (Reuters) - Money continued to pour into U.S. Treasuries on Friday on coronavirus concerns, pressuring central bankers to cut rates by sending the yield on the two-year note below 1% for the first time since 2016. Yields on longer-term Treasuries were also down sharply, with the yield on the benchmark 10-year note down 12.6 basis points in afternoon trading to 1.1732%. Late on Friday morning the note's yield was 1.1453%, marking a record low for the fourth consecutive day. Six countries reported their first cases of the coronavirus as the world prepared for a pandemic and investors fearing a global recession dumped equities. With world stock markets set for their biggest weekly decline since the 2008 global financial crisis, investors flocked to safe-haven U.S. government bonds. The trading also reflected expectations central banks would cut rates to offset economic shocks. A sharp two-day spike in April federal funds futures left the implied fed funds rate at 1.34% early Friday. Traders now see a 100% chance of at least a 25-basis-point cut to the current 1.50%-1.75% fed funds target rate at the Federal Reserve's March meeting, according to the CME FedWatch tool, There were calls for the Fed to coordinate cuts with other central banks. "Given the bloodbath we've seen in the equity markets, the psychological impact of a rate cut will likely be seen positively," said Mary Ann Hurley, vice president for fixed income trading at D.A. Davidson. The two-year U.S. Treasury yield was down 15.8 basis points to 0.9447%, and at one point was at 0.8913%, its lowest level since late 2016. The two-year yield is seen as a market proxy for fed funds, and the drop widened the differential with the target rate to more than 50 basis points, which could add pressure on the Fed to cut to keep the costs of short-term money aligned. The movement also steepened the portion of the U.S. Treasury yield curve measuring the difference between yields on two- and 10-year Treasury notes. It was at 22.6 basis points, up 8.6 basis points from Thursday's close, after reaching as high as 27 basis points. However, even though the market is expecting rate cuts, it is not clear that they would address the root public-health concerns driving trading, said Subadra Rajappa, head of U.S. rates strategy for Societe Generale. The situation facing Fed policymakers now, she said, is "more a supply shock than any meaningful slowdown in the economic data. It puts them in a tough spot. It's not clear that rate cuts would have a meaningful impact on stabilizing what is ultimately a fear factor in the market," she said. D.A. Davidson's Hurley said Fed policymakers also may be reluctant to lower rates after easing three times last year. "They're running out of bullets," she said. St. Louis Federal Reserve Bank President James Bullard said on Friday that the Fed does not need to cut U.S. interest rates just because markets have priced in aggressive central bank action, but policymakers will be monitoring events closely before the upcoming March 17-18 meeting. February 28 Friday 1:07PM New York / 1807 GMT Price Current Net Yield % Change (bps) Three-month bills 1.29 1.3156 -0.138 Six-month bills 1.1475 1.1733 -0.142 Two-year note 100-91/256 0.9447 -0.158 Three-year note 101-70/256 0.9372 -0.156 Five-year note 100-192/256 0.9708 -0.136 Seven-year note 100-68/256 1.0855 -0.133 10-year note 103-16/256 1.1732 -0.126 30-year bond 107-140/256 1.6784 -0.105 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 5.50 2.00 spread U.S. 3-year dollar swap 3.25 2.25 spread U.S. 5-year dollar swap 2.75 1.50 spread U.S. 10-year dollar swap -5.00 0.50 spread U.S. 30-year dollar swap -38.50 -1.25 spread (Reporting by Ross Kerber and Dhara Ranasinghe; Editing by Giles Elgood, David Gregorio, Jonathan Oatis and Dan Grebler)