This is one of those times when it’s simply impossible to keep track of all the downgrades, dour projections and reassessments pouring in from Wall Street, let alone all of the indicators flashing bright-red (figuratively and literally) from the market itself.
On Friday, for example, we got a new record low on US 10s, the biggest collapse in Libor since 2008 and an extension of the rally at the front-end, bringing this week’s drop in two-year yields to more than 40bp, the most since the crisis.
And all of that is to say nothing of the absolutely manic action in STIRS, as money market traders race to price in Fed cuts amid one of the worst weeks for US equities since World War II.
BofA’s Paul Ciana said Friday that “1.5% is the new 2%” when it comes to capping 10-year US yields. A “good news” scenario would find yields rising to 1.7%, he went on to remark, adding that 10s could very well head below 1%.
Goldman now sees a “short-lived” contraction for the global economy as the most likely outcome given the drag from the COVID-19 outbreak. Although the bank doesn’t see an “outright recession” on a global scale, Hatzius’s rates forecast in the “short-lived” contraction scenario is for 75bps worth of Fed cuts in the first half.
The 2s10s has steepened back out to 24bps thanks to the plunge at the short-end. Although there were a variety of factors that contributed to the bull flattening impulse evident from the beginning of the year into the virus scare (e.g., the appeal of USD assets as havens, the Q4 reflation trade having overshot, Treasury yields attractive relative to NIRP economies, etc.) the simplistic interpretation was that the market was warning policy makers that growth and inflation expectations were deteriorating. This week’s bull steepening is essentially the market saying this: “Ok, now it’s bad. You’re gonna cut rates. You don’t have choice”.
Meanwhile, if politicians in Berlin needed any further prodding when it comes to unleashing fiscal stimulus in order to rescue Germany from the deepest factory slump in recent memory and pull the world’s fourth-largest economy back from the brink of recession, the yield curve provided a stark reminder of just how dour the outlook is.
The German 5s30s is now the flattest since the crisis.
At this point, the bond market is making demands, analysts are throwing in the towel and central banks are going to have to once again bend the knee.
Any questions?
If so, you can direct them to Jerome Powell, who released the following dry statement on Friday afternoon, with the Dow down more than 3,500 points for the week:
February 28, 2020
Statement from Federal Reserve Chair Jerome H. Powell
For release at 2:30 p.m. EST
If I had any bonds, I’ sell them all and pay the cap gains instead of regular income tax.
0%, here it comes, along with the nasty consequences H has been writing about for so long. I’d be afraid of corporates, as defaults will be way ahead of rating agencies. Apparently no one remembars 2008.
This statement is about 96 hours late. There should have been a rate cut and balance sheet announcement yesterday or today. This is a very reactive rather than proactive FOMC. And they are tone deaf to the market. The FRB needs some industry and banking executives on the Board. Too many academics plus Powell who is a lawyer by training, who seems to be completely out of his league. Williams in NY Fed was also not a good selection. The NY Fed president should be someone much more sensitive to banking and finance. Williams is an academic. Both Powell and Williams are sound professionals who are seriously miscast in their roles. It shows. The Fed funds debacle last fall was an embarrassment to the NY Fed. This week is turning out to be an embarassment to Powell and especially Clarida. Maybe someone can tell me what they are saving their firepower for? One of the first priorities of the Fed is the safety and soundness of the banking and financial systems. They are clearly dropping the ball.
@RIia Bullcrap. The Fed isn’t supposed to save everyone’s speculating arse every time the market hiccups. After the bull run we’ve had, the raging hot employment numbers, and the ridiculous heights to which assets have been pushed, Powell would do best to let the whiny Wall St. brats poop their pants and marinate it in a few more days. NO CUT. At least not until we actually have local evidence of real economic impact in the U.S.
I agree with Privateer on this…. The Bankers think they deserve to be at the Head of the Line every time this system gets in a bind which tends to be regularly… I am not sure about fault but if bankers had it their way the blame would surely discount their role in all this…
RIA: To your comment regarding the safety and soundness of the banking and financial systems, and the Fed’s responsibility thereto… Are any US banks on the verge of failure after the last 7 trading days? No. Are CREDIT markets seizing up? No. Are corporate bond spreads blowing out wildly from all-time tights? No. I’ll stop there. This is not yet a September 2008 emergency situation. They just cut 75 bp’s and once again expanded their balance sheet, which is probably why the answers to all of the foregoing questions were “no”. So there’s no need to run out into the street with your hair on fire just yet, and we shouldn’t want to have a Fed chairman who responds to every late-night booty call from the Wall Street equity guys. When credit markets go haywire, JP will be front and center, that’s my guess.
You know who else dropped the ball this week? The President and both houses of Congress. They’ve got a checkbook too, and yet they sat around all week with one hand up their asses and the other hand pointing fingers across the aisle.
Final point, if I go get a home mortgage or a CRE loan or an equipment loan for my business, my bank sets the loan’s interest rate based on the 3-, 5-, or 10-year US Treasury Rate. Those index rates for my new loans have already gone down (A LOT!!!). So I don’t care if the overnight Fed Funds target rate goes down 25 bp’s next week or not. The market action in the Treasury Curve has already provided me with my “rate cut”. Seems to me, only the EuroDollar futures traders down at the CME care about the “exact” timing of the actual Fed Funds cuts for the purposes of settling out their futures contract positions upon expirations.
Good post. Agree with everything you said.
Nothing could validate the Coronavirus fear quite like an emergency rate cut…..