Reuters/Tim Shaffer
Investors expect the US economy to plunge into recession and stay there, according to Paul Krugman.
“Mr Market is basically saying that we’re headed for permanent recession,” the New York Times columnist and Nobel Memorial Prize-winning economist tweeted on Monday, referring to an attached screenshot of US Treasury yields.
Treasury yields plunged on Monday as investors reacted to growing coronavirus fears and the breakout of an oil-price war by ditching stocks, commodities, and cryptocurrencies in favor of haven assets such as gold and government bonds. The demand surge drove up the price of Treasuries, reducing their yields.
The yield on the benchmark 10-year Treasury tumbled to a record low of less than 0.4%. The 30-year Treasury yield also dropped, dragging the entire Treasury yield curve below 1% for the first time in history. Yields regained ground on Tuesday but remained depressed.
Investors’ willingness to accept rock-bottom yields underscores their deep concerns about the global economy. They prefer to accept a return below the average rate of inflation than risk parking their money elsewhere.
Moreover, the yield declines reflect market expectations that the Federal Reserve — which slashed interest rates to between 1% and 1.25% last week — will make further cuts, reducing the already meager interest earned from bank deposits. If rates fall to zero, Treasury yields below 1% look relatively attractive to investors.
Interest rates themselves underscore investors’ pessimistic expectations for global growth, Krugman argued.
“Never mind cratering stock prices,” he wrote in a New York Times column on Monday. “The best indicator of collapsing confidence is what is happening to interest rates, which have plunged almost as far and as fast as they did during the 2008 financial crisis.”
“Markets are implicitly predicting not just a recession, but multiple years of economic weakness,” he added.
