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As the coronavirus makes its way across the world from China, investors have tried to assess the potential toll on financial markets by looking at previous viral pandemics.
Analysts have specifically looked at how Wall Street has previously reacted to the spread of SARS, or severe acute respiratory syndrome, in 2002-04 as the pathogen bears a resemblance to the coronavirus.
The virus’s victims have swiftly piled up, with 17 deaths and more than 600 cases confirmed by health officials, but the coronavirus, so far, still pales to the lethal SARS which eventually left a death toll of about 800, mostly in Asia.
Still, the comparison “offers useful food for thought,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
The worst of the damage on financial markets during the outbreak of SARS was contained to Hong Kong HSI, -1.52% and Chinese stock-market indices 000300, -3.10% , but it did have a significant impact on the global safe-haven — U.S. Treasurys, as panicked investors sought shelter in government bonds, he said.
In the eight months after November 2002, when the first SARS case was reported, the 10-year Treasury note yield TMUBMUSD10Y, -2.80% plunged as much as 80 basis points to hit a low of 3.07% in June 2003.
A similar flight to haven assets has played out in the last few days.
Since Tuesday when the first case of the coronavirus was reported in the U.S., the 10-year Treasury yield TMUBMUSD10Y, -2.80% has fallen more than 10 basis points to later trade at around 1.722% on Thursday, Tradeweb data show.
It’s why Lyngen feels a new record-low for the 10-year yield is in the cards this year. To do that, the benchmark yield would have to fall around 40 basis points to push below the 1.32% all-time floor established in June 2016.
“And even if the latest viral worries do not directly inspire a break of 1.32%, they do serve as a reminder of the structural demand for Treasuries during times of uncertainty,” he said.
But others are more skeptical if only because previous viral outbreaks like Zika left Wall Street largely unscathed.
David Lafferty, chief investment strategist at Natixis, argues it would take a significant dent on the Chinese and domestic economy for the bond-market to rally much further on the coronavirus.
Though Treasurys could benefit from short-term surges in haven demand, it would take a more persistent change in economic growth and inflation rates, the fundamental determinant of government borrowing yields, to have a material effect, he told MarketWatch.
Even if the economic impact in the U.S is likely to be limited, economists do see the potential for Chinese consumers and tourism-related sectors to receive a drubbing in the coming months if Beijing struggles to contain the virus’s spread, especially in the crucial New Year holiday period when millions across the country will travel to meet with family.
Analysts at Société Générale estimate that if the coronavirus continues to remain a problem through March, China’s first-quarter gross domestic product growth could fall below 6% this year, shy of their current forecast of 6.1%.
