Defcon 1.

Rates went into something like Defcon 1 on Friday, as bond yields absolutely plunged with global equities, and dollar-funding stress started to bleed over.

Fear is in the driver’s seat with a death grip on the steering wheel and is mashing the pedal to the proverbial metal.

10-year US yields tumbled 21bps at one juncture to 0.70% – and no, that is not a typo. 2-year yields plunged 15bps, to 0.45%. I’m running out of superlatives to describe this situation, but suffice to say that if something doesn’t put the brakes on, we could see 0% on the US 10-year sometime next week.

Sweden’s entire curve went negative as the country’s 20-year yields fell below zero Friday. German yields approached the record lows from August (10-year bund at -0.72%). Gilts rallied, with the UK 10-year at 0.259%, a new record low.

30-year US yields touched 1.21% (more on that here). And China’s 10-year yields fell to the lowest since 2002 at 2.63%.

The yen, meanwhile, is on an absolute tear. After briefly losing its haven status late last month, the currency has reclaimed its allure as a safe harbor, and is now up some 4% since the virus outbreak started. USDJPY breached 105 on Friday for the first time since August, and that’s just adding to the risk-off impulse.

Funding stress is manifesting in a sizable widening in FRAOIS (20bps over two sessions – basically a straight line), while Aussie Bill/OIS widened overnight too, and it spilled over into Europe with EUR and GBP basis moving wider, pressuring Euribor.

(BBG)

“This obviously has the look of a Rates ‘convexity-event’ (forced hedging / buying at the highs from mortgage investors, insurance companies and those who are ‘short options’… but this is also a simple function of OIS markets now pricing-in a full additional 50bps rate cut in March from the Fed”, Nomura’s Charlie McElligott said Friday, adding that there’s also “the obvious dynamic where rates are your ‘everything hedge’ from cross-asset investors (i.e. equity L/S investors buying ED$ upside)”.

Equities melted in Asia. The Topix dropped nearly 3%. Japanese stocks are down 14% since early February and it goes without saying that the surging yen isn’t helping.

Making matters worse for risk assets, Russia remained stubborn on the proposed deep OPEC cuts to support plunging crude prices.

The Saudis decided to gamble on Thursday in Vienna and, ultimately, it backfired. OPEC+ is effectively dead. Crude plunged.

The Fed is now backed into cutting by 50 more basis points later this month. “They’ve lost control”, one trader I spoke to on Friday morning said, bluntly.

And it may not matter for stocks. “Despite the persistent proverbial hype of ‘don’t fight the Fed’, we have always warned against getting bullishly excited when the FOMC commences an easing cycle”, JonesTrading’s Mike O’Rourke said Thursday evening. “Those early rate cuts are fool’s gold enticing and subsequently trapping equity investors into paying bad prices for equities”, he went on to caution. “In turn, that makes the necessary unwind that much more painful”.