Treasurys, Dow tank as virus fear spreads
The 10-year Treasury note yield is trading at record lows this week as the Dow Jones Industrial average slipped into correction territory. The Dow was expected to drop even further at the start of trading Friday morning with futures pointing to at least a 400-point dip. This is the worst week for the Dow since the 2008 financial crisis. And this is all related to the fear of a global pandemic because of the coronavirus.
The virus continues to spread worldwide and now there are multiple reported cases in California, including one with an unknown origin. The news of the continued spread of the virus has investors fearful of a major global economic slowdown, which partially caused a massive selloff Monday. The Dow dropped nearly 1,000 points Monday then tumbled another 1,100 points on Thursday, putting it into correction territory. A correction is when the market loses at least 10% of its value related to the 52-week high. Anything at 20% or beyond is considered a bear market.
The benchmark 10-year Treasury note yield hit record lows multiple times this week, starting trading Friday at a paltry 1.186%. That is due in part to Dow futures showing potential for another 400 points drop early Friday morning.
A slowdown in global economies will have a major effect on American businesses. Even Goldman Sachs analysts have predicted this week that the spread of the virus will result in 0% growth for U.S businesses in 2020. The biggest concern is supply chain. With tens of thousands of people sick, they are not traveling and they are not going to work or school. That means manufacturing businesses with hubs in China, like Apple or Nike, and also airlines like Delta and United, are facing supply chain shortages and travel shortages. Even Microsoft reported this week that they are not expecting to meet quarterly revenue goals because of this issue.
Goldman's chief U.S. equity strategist David Koston told clients that, "A more severe pandemic could lead to a more prolonged disruption and a U.S. recession." It is important to note that a correction is very different from a recession. The U.S. economy has been expanding for 11 years so we are sitting at a very high level right now. Like we mentioned above, it would take at least a 20% drop from the 52-week high to be considered in a bear market and potential recession.
Mortgage rates drop again, home sales increase
The drop in the market and Treasury yields has been fortuitous for the housing industry. Freddie Mac's 30-year fixed-rate mortgage average is sitting at 3.45%. On Feb. 28, 2019, Freddie Mac's 30-year fixed-rate average was 4.35%, making this a perfect opportunity for many people to refinance the home loan they got just one year ago and significantly reduce their interest rate.
The Mortgage Bankers Association senior VP and chief economist Mike Fratantoni said that FHA refinance applications jumped by more than 22% this week, even though there was a decrease in refi applications for conventional loans. We will likely see that refi number jump up next week considering recent volatility.
Purchase applications and pending home sales were also up this week according to the MBA and National Association of Realtors. The Commerce Department released its home sale numbers this week showing new home sales hitting a 12.5-year high in January. New home sales jumped by 7.9% to 764,000 units in January, the highest level since July 2007.
