MOVE Spikes To Three-Year High, Markets Price Aggressive Fed Cuts Amid Global Panic

This week’s raging rates moves continued on Friday, as bond yields plunged and rate cut bets were pressed amid an across-the-board rout in global equities.

Two-year yields fell 10bps Friday, while 10-year yields have dropped 32bps this week alone, and touched a new record low of 1.15%.

Five-year yields fell below 1% for the first time since 2016. Markets are now fully priced for a rate cut from the Fed in March and more than 80bps of cuts (cumulatively) are priced by September. For the full year, traders are pricing in nearly four cuts.

Rates vol. is on the move – figuratively and literally.

The MOVE is up around 30bps since Valentine’s Day. It now sits above 92, the highest in more than three years, dating back to the deflation scare in early 2016.

(BBG)

We’ve just witnessed the most dramatic two-week rise in the gauge since 2009.

“What’s uncertainty worth? Well, apparently in 10-year yields it’s at least 66bp over the course of two months”, BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote Thursday, adding that “whether or not 100 bp is justified will be a function of several factors [including] the persistence of incomplete information related to COVID-19, guidance from health officials globally as the ‘pandemic’ label is undoubtedly on the table and the responsiveness of central banks in mitigating the economic fallout”.

As far as central banks and their capacity to mitigate the situation goes, they’re clearly limited on both the rates side and the asset purchases side, although theoretically, policymakers can buy as many bonds as governments and corporates can issue (remember, restraints on the ECB’s asset purchase programs – plural – are to a great extent political and self-imposed).

Of course, market functioning and price discovery concerns come into play eventually, but it’s worth noting that the BoJ commandeered the JGB market long ago, and intermittent tantrums notwithstanding, that hasn’t precipitated any real disasters – yet, anyway.

When it comes to policy rates, the “reversal rate” discussion is squarely in play in Europe, and although we’re nowhere near having that chat in the US, the Fed certainly doesn’t want to get there. The idea of negative rates stateside has virtually no political support outside of the Oval Office.

“Will the Fed cut to ease panic? Possibly, though easing panic isn’t really its job”, Bloomberg’s Sebastian Boyd remarked on Friday. “Has there been significant new news to justify markets pricing in more than two cuts by the end of June, as opposed to the single cut they were pricing on Monday? Not really”.

“The prospects are quickly building for global central banks to foam the proverbial runway in hopes of a softer landing than might otherwise occur”, Lyngen, Jeffery, and Hill go on to say, before echoing similarly skeptical assessments from other corners: “There is an argument that the effectiveness of a rate cut or two in combating the outbreak isn’t worth using up the ammunition which will eventually be required to address a ‘real’ downturn in the domestic economy”.

Fed officials remain recalcitrant. Here’s a smattering of this week’s Fedspeak:

Richard Clarida: “Monetary policy is in a good place [and] it is still too soon to even speculate” about the impact of COVID-19 on the outlook for the US economy

Loretta Mester: “Monetary policy is well calibrated to support our dual mandate goals, and a patient approach to policy changes is appropriate unless there is a material change to the outlook”

Charles Evans: “It would be premature, until we have more data and have an idea of what the forecast is, to think about monetary policy action”

Meanwhile, the VIX spiked to a ridiculous 47 on Friday, before pulling back a bit.