The phrases “toilet paper” and “Treasury bonds” are not often uttered in the same breath. Right now, however, they should be.
As panic about the coronavirus outbreak has spread, western households have scrambled to buy toilet rolls, sometimes in irrational ways. Meanwhile investors are giving in to equivalent impulses, albeit in a less photogenic manner. Each example raises a similar public policy challenge: somehow, anyhow, governments must stop this stampede to prevent a self-reinforcing panic.
To understand this, consider Treasuries. Normally, the price of these bonds rally during a crisis — pushing yields down — because US government debt is deemed a risk-free asset. And when Covid-19 fears exploded earlier this month, the yield on 10-year Treasuries did indeed tumble to 0.4 per cent. So far, so logical, given that the Fed has slashed interest rates and the S&P 500 has fallen by more than a quarter, amid recession fears.