Bond Buyers Won’t Like the Coronavirus Stimulus

Treasury yields have plunged to record lows as investors brace for the impact of the worldwide spread of the coronavirus. With interest rates low or negative around the world, and with central banks struggling to hit their inflation targets even before this evolving public-health shock, it's understandable that investors are ready for another prolonged bout of central-bank deflation fighting. But this ignores the possibility of a critical shift: A fiscal response by governments to offset the economic impact of the coronavirus represents a significant risk to buyers of bonds at these levels.

It's understandable that investors would play down those odds in the face of a scare like the one the world now is experiencing. For more than 30 years the main policy tool used to fight financial turmoil and economic downturns has been monetary policy. There's generally been good reason for this. The experience with high inflation in the 1970s was a formative event for policy makers for the next four decades, making them cautious about jacking up spending in response to a slowdown.