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.
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