U.S. Treasury yields tumble, curve inversion deepens as coronavirus spreads

LONDON (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 far more economic damage than earlier predicted.

The curve inversion between the 3-month and 10-year bond yields also deepened in what has seen as a classic recession signal.

The moves come 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.

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.

While the U.S. economy has been relatively robust so far, Justin Onuekwusi, a portfolio manager at Legal & General Investment Management, said: "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.

As investors sold stocks and rushed for safe-haven assets, the 10-year Treasury yield fell eight basis points to 1.39% , having earlier touched 1.377% - its lowest since July 2016.

The 30-year Treasury yield touched a new record low at 1.873% , also down 8 bps on the day.

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 fairly reliable gauge of U.S. recession.

The 3-month/10 year curve was at its most inverted since October at minus 0.17% 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.

(Reporting by Dhara Ranasinghe and Sujata Rao; Editing by Giles Elgood)