Part of yield curve inverts as 3-month rate tops 10-year

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, January 24, 2020.
Lucas Jackson | Reuters

The bond market sent a recession signal on Thursday as China's fast-spreading coronavirus reignited fears of an economic downturn.

The yield on the benchmark 10-year Treasury note dipped four basis points to 1.546%, falling below the three-month Treasury rate briefly, inverting part of the yield curve that the Federal Reserve watches closely. Bond yields move inversely to prices. The three-month Treasury yield was last trading at 1.554%

The so-called yield curve inversion has been a strong sign since 1950 that a recession is coming in the next 12 months. A more widely monitored part of the yield curve — the gap between the two-year and 10-year yields — inverted last summer when the U.S.-China trade war escalated.

But the Federal Reserve has been known to watch the three-month and 10-year yield gap as well.

"Some of this narrowing is certainly due to worries about the virus but also on the belief within the Treasury market that a growth inflection higher of note in 2020 is not going to happen," Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note.

Yields extended losses even after data showed the U.S. economy grew 2.1% in the fourth quarter, matching expectations of economists surveyed by Dow Jones.

The Fed held interest rates steady at its meeting this week. The decision followed three consecutive reductions to borrowing costs in 2019.

During a press conference following the rates decision, Fed chairman Jerome Powell said the central bank is "very carefully monitoring" the situation with the fast-spreading coronavirus.

Chinese health officials confirmed there had been 7,711 cases of the deadly pneumonia-like virus at the end of Wednesday, with 170 deaths.

The coronavirus, which was first discovered in the Chinese city of Wuhan, has since spread to other major cities such as Beijing, Shanghai, Macao and Hong Kong.

Financial markets have been spooked by the outbreak, with investors trying to assess the potential economic fallout.

The World Health Organization's (WHO) Emergency Committee is set to reconvene on Thursday, with officials poised to decide whether the international spread of the virus constitutes a global health emergency.

The U.S. Treasury is set to auction $45 billion in four-week bills and $45 billion in eight-week bills on Thursday.

— CNBC's Sam Meredith contributed reporting.