Key Section Of Yield Curve Crashes To 2007 Low Amid Biggest 5-Day Move In 10s In 8 Years

To quote Sesame Street: “Wednesday was brought to you by the letter ‘R'”. “R” for “recession”. Or “A” for armageddon. Or maybe “P” and “M” for “policy mistake”.

Bond yields plunged on Wednesday amid growth jitters, trade concerns and rate cuts from central banks worried sick about the outlook.  It’s now abundantly clear that the White House erred in escalating the trade conflict and that the Fed is fumbling around in the dark with no good ideas for how to reclaim the narrative or otherwise clarify last week’s convoluted messaging.

Those two errors (the trade escalation and the Fed’s murky communications) have “succeeded” in flattening the 2s10s to just 8bps, the narrowest since 2007.

As illustrated in the top pane, 10-year US yields have fallen some 40bps over the past five sessions. That is the biggest five-day drop since the debt ceiling crisis (h/t LK).

It is entirely possible that we are now past the point of no return. The Fed isn’t in a position to atone for the communications error from the July press conference. Donald Trump on Wednesday demanded (quite literally) “bigger, faster rate cuts…NOW“, which means it is virtually impossible for Jerome Powell to do anything without being accused of having overtly politicized US monetary policy.

Complicating things further is the fact that the global effort to cut rates and ease policy is in no small part due to the trade war. Trump’s demands for “matching” Fed cuts are motivated by the White House’s desire to “win” that war. That, in turn, means that if the Fed were to do something “aggressive”, they would be acquiescing to a role in fighting the president’s battles, something policymakers want no part of whatsoever.

The upshot: Even if there is an economic case to be made for the kind of emergency monetary policy response Trump wants to see (i.e., the kind of response that would help alleviate some of the pressure on the curve both by pushing the front end lower and stabilizing the long end by giving the market a glimmer of hope vis-à-vis the reflation narrative), Powell can’t make it because the White House is giving him zero plausible deniability.

Oh, and the 3-month/30-year curve is close to inverting too…