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Person-To-Person Inversion.

It's starting to feel like August all over again for markets.

The CDC (along with Illinois public health officials) on Thursday confirmed the first person-to-person transmission of the deadly coronavirus in the US.

During a press conference, CDC officials explained that the Chicago woman who brought the infection back from Wuhan ended up passing it to her spouse, who is in good condition. I suppose we should qualify that. The person’s condition is as “good” as can be expected considering the diagnosis. The mystery virus has now killed 171 people and sickened 8,200 in China. So, perhaps “good” is misnomer.

Later, the World Health Organization called the spread of the virus a public health emergency of international concern, allowing for the coordination of government responses around the world. The WHO emphasized that the declaration was not a vote of no confidence in China’s response.

Markets were not amused. Equities, already on the back foot, sank to day lows after the CDC news, and the yen built on gains, with USDJPY nearing its 200-day moving average. The moves were subsequently faded, reaccelerated around the WHO announcement, and then faded again. You know how it goes. By the time it was all said and done, US stocks were higher on the day.


At one point, Treasury yields fell far enough to bring in the convexity flows. Dollar swap spreads tightened in what could be a mini-repeat of August, when the bond rally was exacerbated as portfolio hedgers chased the decline in yields.

Bloomberg documented the action in and around the CDC news. “Over a 3-minute period 33.2K TY Mar20 contracts changed hands in [the] move up to 131-17 session high”, Edward Bolingbroke wrote. 10-year yields fell as low as 1.534%.

Adding to market consternation on Thursday is the re-inversion of the 3-month, 10-year curve.

This isn’t great news for the Fed. The virus scare has seemingly placed us right back into an August-like scenario where the market thinks monetary policy is behind the curve (figuratively and literally) as risks to the global growth outlook proliferate. At the same time, dynamics not well understood by many investors (e.g., convexity hedging) are likely serving as accelerants, causing yields to fall further than can be explained by fundamentals alone.

“Convexity-related flows [from] Mortgage portfolios & VA / Fixed-Asset Annuities from Insurance Co.’s have driven ongoing demand in low-strike Receivers, although nothing to the extent seen during last year’s ‘convexity bursts’ in March [and] August”, Nomura’s Charlie McElligott remarked.

2-year yields are 4bps richer on Thursday, but if we get another couple of days like this one without any reason to believe the Fed is inclined to cut rates sooner rather than later, it’s entirely possible the 2s10s will make another run at inverting. In other words, markets clearly doubt the Fed’s resolve, credibility, or both, when it comes to resurrecting inflation by doing what’s necessary to head off another growth scare.

Crude and breakevens are the usual chicken-egg scenario, but WTI futures are down nearly 18% since the Soleimani strike spike.

And then we’ve got 5-year real yields down around -20bps, which is just reinforcing the bid for gold, as shiny paperweights look for new “since-2013” highs.

As Trump would say: “Enjoy!”


5 comments on “Person-To-Person Inversion.

  1. Nothing screams “we’re all gonna die” like people dying daily from new and novel disease. Given last week this was “pfff it’s probably going to be like SARS” and a week later it looks serious. I would not take bets on where we are in two weeks.

  2. But the markets still managed to close in green. Tesla 650$. Amazon +12% in AH (that’s around 110 billions), just because they beat fake expectations. NDX futures up 200pips from the daily low. This is getting more absurd every day.

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