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Global Bond ETFs in a Sweet Spot on Coronavirus Scare

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Amid global growth concerns sparked by rising coronavirus fears, safe-haven assets have been in a favorable position this year. While the virus issue has been bothering stock markets over the past month, fears escalated on Feb 24 with the S&P 500 and the Dow Jones seeing the steepest single-day slumps in two years (read: Looking to Buy the Dip? Play These Top-Ranked ETFs).

Notably, the International Monetary Fund (IMF) recently said that the virus scare will likely dent global growth by 0.1% and drag down China’s economic growth to 5.6%, which is 0.4% lower than IMF’s January outlook. IMF slashed the global growth forecast in January as well. The organization warned that further severity of the virus contagion may mar the global growth picture.

Goldman Sachs has cautioned that the coronavirus is the biggest near-term risk to stock markets, which can succumb to a correction. "Chinese tourism alone now accounts for 0.4% of global GDP, and the number of 'missing work days' in China will be roughly equivalent to the entire US workforce taking an unplanned break for two months," per Goldman's chief global equity strategist Peter Oppenheimer.

Apple (AAPL - Free Report) , Tesla (TSLA - Free Report) , McDonalds (MCD - Free Report) , Yum China YUMCStarbucks (SBUX - Free Report) , Walt Disney (DIS - Free Report) , United Airlines Holdings Inc. (UAL - Free Report) and Mastercard Inc (MA - Free Report) are some of the companies that are going to be hit hard by the outbreak.

Global Bond Yields Spiraling Down

The above-mentioned data and facts explain the extent of fears among investors. As a result, there was a flight to safety and global treasuries gained. The yield on 10-year securities dropped by as much as 11 basis points on Feb 24 to 1.36% — “the lowest level since 2016 and within 5 basis points of its all-time low.” Bets on the Fed slashing rates this year have also surged.

At the current level, according to CME FedWatch tool, there is a 46.6% chance of a 25-bp rate cut in the June meeting, 20.8% probability of a 50-bp slash and 2.3% possibility of a 75-bp cut. Not only in the United States, the Euro zone benchmark German bund yields also slumped. German 30-year bond yield dropped below zero percent for the first time since October. The yield on Germany’s 10-year bond or Bund fell to a negative 0.5%, its lowest in more than four months, implying that the entire German yield curve is in negative territory.

Though emerging markets (EM) are in a tight spot as China is the epicenter of the coronavirus eruption, the bloc’s bonds are performing pretty well of late. Risky assets like EM equities are facing the brunt, while EM bonds are on a tear.

iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB - Free Report) was flat in the past five days (as of Feb 24, 2020) versus the 4.6% loss of the S&P 500 and 5.9% slump in the iShares MSCI Emerging Markets ETF (EEM - Free Report) (read: Will Emerging Market ETFs Survive the Coronavirus Outbreak?).

So, global bond ETFs are likely to be in focus, at least till the time the contagion is not contained.

Global Bond ETFs Are Best Bets Now

Some of the top-performing international bond ETFs in the past month are iShares International Treasury Bond ETF IGOViShares Core International Aggregate Bond ETF IAGGSPDR Bloomberg Barclays International Treasury Bond ETF (BWX - Free Report) Vanguard Total International Bond Index Fund ETF Shares BNDXSPDR Bloomberg Barclays International Corporate Bond ETF IBND and Vanguard Total World Bond ETF BNDW. Some of these funds have solid exposure to the United States (see all Government Bond ETFs here).

Some U.S. bond ETFs that are on a 52-week high now are PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ - Free Report) , Vanguard Extended Duration Treasury Index Fund ETF Shares EDV and iShares 20+ Year Treasury Bond ETF (TLT - Free Report) .

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