(.) By Dhara Ranasinghe, Sujata Rao and Ross Kerber Feb 24 (Reuters) - U.S. 10-year government borrowing costs fell on Monday to their lowest levels since 2016 as more coronavirus cases were reported internationally, raising fears the outbreak could do significantly more economic damage than predicted. The curve inversion between the 3-month and 10-year bond yields also deepened in what has been seen as a potential recession signal. The moves came as investors dumped shares and fled for the safety of bonds, perceiving a risk that China's coronavirus outbreak will grow into a pandemic, with disruptive and deadly consequences around the world, as the number of infections rose sharply in South Korea, Italy and Iran. "It's a flight to quality," said Ellis Phifer, market strategist for Raymond James in Memphis, Tenn. He noted that bond yields have fallen sharply since late last year, when the 10-year was approaching a 2% yield. In contrast, U.S. equities indexes had been relatively steady until Monday, when they fell nearly 3%. "The bond market has been a little ahead of this," a reason bond yields did not fall further, Phifer said. As investors sold stocks and rushed for safe-haven assets, the 10-year Treasury yield fell 10 basis points to 1.3705%, after earlier touching 1.359% - its lowest since the summer of 2016. Its all-time low of 1.321% was reached on July 6, 2016. The 30-year Treasury yield touched a record low at 1.813% , and was down 9.4 basis points 1.8235%. Italy is racing to contain the biggest outbreak of coronavirus in Europe, sealing off the worst-affected towns and banning public events in much of the north as a fourth patient died of the illness. Justin Onuekwusi, a portfolio manager at Legal & General Investment Management, said that while the U.S. economy has been relatively robust so far, "The U.S. Treasury market is pricing that the world economy is going to be flirting with sub-2% growth." World growth falling below 2% is generally considered equivalent to recession, taking into account population growth and poor countries' need for faster expansion. Focus is likely to turn to the yield curve - the gap between short- and long-dated bond yields. Curve inversion, when short-dated borrowing costs are higher than those further out, is considered a potential gauge of U.S. recession. The 3-month/10 year curve was at its most inverted since October at negative 17 basis points while the 2-year/10-year curve is inching that way, standing at just 11 basis points, the flattest since last October. Money markets have deepened their bets on interest rate cuts by the Federal Reserve, now roughly pricing a 25 basis-point cut in June. The bets picked up steam after purchasing managers' index (PMI) surveys on Friday showed U.S. business activity in both the manufacturing and services sectors stalled in February, the latter slipping to its lowest since 2013. "The shock contraction in the U.S. service sector brought home how close we might be to recession because of the coronavirus," London and Capital Group told clients. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 9.2 basis points at 1.2578% in morning trading. February 24 Monday 10:30AM New York / 1530 GMT Price Current Net Yield % Change (bps) Three-month bills 1.51 1.5407 -0.018 Six-month bills 1.45 1.4848 -0.038 Two-year note 100-57/256 1.2578 -0.092 Three-year note 100-122/256 1.2112 -0.100 Five-year note 100-198/256 1.2129 -0.103 Seven-year note 101-88/256 1.2966 -0.102 10-year note 101-52/256 1.3705 -0.100 30-year bond 104-16/256 1.8235 -0.094 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 0.25 -0.50 spread U.S. 3-year dollar swap -1.25 -0.50 spread U.S. 5-year dollar swap -2.50 -0.25 spread U.S. 10-year dollar swap -8.00 -0.25 spread U.S. 30-year dollar swap -38.50 -0.50 spread (Reporting by Dhara Ranasinghe, Sujata Rao and Ross Kerber; Editing by Giles Elgood and Dan Grebler)
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