Treasuries and the yen led a sell-off in haven assets on bets that governments worldwide will introduce fiscal measures to deal with the economic fallout from the coronavirus.
The yen tumbled by the most since 2014, while Treasury 10-year yields saw their biggest one-day jump in more than three years. Bonds from Japan to Australia were also sold.
Investors have been calling for fiscal measures as the COVID-19 virus contagion worsens, crimping supply chains and denting consumer sentiment. U.S. President Donald Trump on Monday flagged the possibility of a payroll tax cut, while Australia said it was close to a stimulus package.
“Haven assets have been sold broadly due to high hopes on Trump’s economic measures,” said Shinichiro Kadota, a foreign-exchange and rates strategist at Barclays PLC in Tokyo. “The yen could be sold further if the market can be convinced that the package could actually help the economy.”
The yen dropped more than 2% to ¥105.02 a dollar, giving up most of the gains from Monday’s blistering rally.
Treasuries were sold across the curve, with the 10-year futures hitting limit down to trigger circuit breakers. U.S. bonds had gone on a record-setting rally on Monday, with the entire curve dropping under 0.7%.
On Monday, the International Monetary Fund’s chief economist urged policy makers to implement targeted fiscal, monetary and financial market measures in response to the coronavirus outbreak.
New Zealand’s finance minister said Tuesday the central bank has room to move on interest rates. In Japan, there was a report that the ruling Liberal Democratic Party sees a need for as much as ¥20 trillion ($191 billion) worth of stimulus in April or May.
“Discussions on fiscal stimulus are getting louder,” said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “That, along with the fact that bonds have been overbought, has triggered the reversal.”
Yields on Japan’s 10-year bonds climbed as much as 13.5 basis points, the most since 2013. The benchmark in Australia also surged by 18 basis points.
Treasury 10-year yields jumped by 16 basis points to 0.705%, rebounding from the 22 basis points drop on Monday.
Traders point to worsening liquidity as a contributing factor to the ferocious rally on Monday, and the subsequent snap back. Based on Bloomberg’s U.S. Government Securities Liquidity index, a gauge of how far yields are deviating from a fair-value model, liquidity conditions are the worst since 2016.
“Treasuries will remain extremely volatile,” said Masahiko Loo, a fixed-income portfolio manager at AllianceBernstein Japan Ltd. Still, “yields are expected to stay under downward pressure as long as concerns over the coronavirus remain in place.”
