Fears Mount About Inflation Returning With a Vengeance (But No Signs Of Inflation Yet)

Given the reaction of The Federal Reserve to the Covid-19 virus, it is understandable for investors to freak-out about possible Weimar Republic / Venezuela-like hyperinflation.

(Bloomberg) — Even a calamity of disease, death and economic destruction afflicting the world all at once isn’t enough to suppress the notion in some quarters that inflation could return with a vengeance.

The coronavirus crisis has killed hundreds of thousands, incapacitated millions and affected the livelihoods of billions — prompting policy makers to fear a deflation spiral reminiscent of the Great Depression. But economists including former Bank of England official Charles Goodhart, and investors such as BNP Paribas Asset Management, are asking if a different phenomenon lurks in the wreckage of global growth.

Muted Price Growth

IMF predictions for inflation rate at end of 2021

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Yes, inflation rates are muted in the short-run, but the surge in government spending and The Fed balance sheet is scaring some people about “inevitable” hyperinflation.

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And the surge in M2 Money Supply YoY is leading some to panic.

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But like the Titanic that sank after striking an iceberg in calm seas, there are calm seas on the inflation front. The EUR Inflation Swap Forward 5Y5Y is less than 1%.

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The USD Inflation Swap Forward 5Y5Y rate is 1.7944%.

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But USD Swaption volatility remains calm after a jolt upwards in March.

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And the US Treasury Inflation Indexed curve is negative beyond 3 years.

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So, the data is showing calm inflation seas, not gut-wrenching Venezuelan-like inflation.

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Dow Finishes Worst Week Since 2008 (Dow Down 913 On Friday) As LOIS Spread Erupts [What Can The Fed Do?]

How far will Central Banks go to save the economy (or banks)? The Fed Funds target rate is back to Bernanke (BtoB?) in late 2008.  And The Fed’s balance sheet keeps rising (after a momentary respite).

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But it seems that all the stimulus (Federal government and Federal Reserve) is having trouble saving the market.

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The S&P 500 hasn’t done so well either with today’s drop falling below the lowest P/E band.

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US Treasuries rose again today and 10-year Treasury yields dropped almost 30 basis points.

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And the spread between the 3 month Libor rate and the NY Fed’s Secured Overnight Finance rate is going up … and up.

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Treasury Repo collateral … again?

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They will do it on Fed Time!

Liquidity Trap! 3M Treasury Yield At -0.025%

A liquidity trap is a situation in which, “after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest.”

Well, Buckaroos, we are in a liquidity trap with the 3 month Treasury yield at -0.025%.

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A closer look at the T-bill market today.

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So here we sit in a classic liquidity trap!

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Fed Chair Jerome Powell in a liquidity trap!

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Mega thanks to Jesse at Jesse’s Cafe Americain for the jail jpg.

Frankly, I like The Byrds version of Buckaroobetter with the great Clarence White on the Fender Telecaster B-Bender guitar.

10Y T-Notes Bid-Ask Spreads Widen To Financial Crisis Levels

The markets are over, under, sideways, down.

Bid-ask spreads on the 10-year Treasury Notes have exploded and is back to financial crisis levels.

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A steepening Treasury yield curve bodes ill for stocks … and volatility.

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Hedge, hedge, hedge!

Fed Tears Through 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) — The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates to Zero?
Check.
The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Outcome-Based Forward Guidance
Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.
The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing?
Check.
The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control?
Still possible.
This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates?
Probably not happening.
Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Now, they have gone to Plan D!

AAA rated CLOs, CDOs and CMBS are among the collateral types eligible to be pledged by top banks and broker-dealers in order to access the Federal Reserve’s emergency lending program for primary dealers.

The Fed’s so-called Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a Tuesday statement announcing the countermeasure to the funding squeeze caused by the coronavirus crisis

It allows for short-term lending and will be available for at least six months at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action
Facility resurrects a program the Fed rolled out in the depths of the financial crisis in October 2008

In addition to AAA rated CLOs, other eligible securities that can be used as collateral include IG corporate debt, international agency securities, IG commercial paper, municipal securities, MBS, and equities (with the exception of ETFs, unit investment trusts, mutual funds, rights and warrants)

CLO spreads are blowing out in secondary trading and the acceptance of CLO AAA tranches by the Fed’s facility could provide some relief. The PDCF program may help the market find an acceptable pricing level amid the volatility in secondary pricing, according to market participants

CLO AAA spreads are at post-crisis wides of 180bp for short weighted average life (WAL) and 230bp for long-WAL profiles.

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West Texas Intermediate crude fell another 16%.

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Meanwhile, the Dow is down another 7%.

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The Fed is going to plan D … which is BUY EVERYTHING!!!

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Fed Restarting Commercial Paper Funding Facility (Everybody Panic!)

As Jackie Moon screamed in the movie Semi-Pro, “Everybody Panic!”

(Bloomberg) – By Christopher Condon – The Federal Reserve will restart a financial crisis-era program to help U.S. companies borrow through the commercial paper market after it came under “considerable strain” due to the coronavirus pandemic.

The central bank is using emergency authorities to establish the Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund.

The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then-current 3-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

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Everybody panic!

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*Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days.

Sea of Red! Brent Crude Down 12.38% As Dow Closes Down 13% (Or 3,000 Points) Hedging Anyone??

We are in a Sea of Red.

Brent Crude is down 12.38% today while agriculture prices are down too.

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US, Europe and Asia are in red territory. With the Dow down 3,000 points or nearly 13%.

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It seems like a good time to hedge the stock market.

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A scene at your local grocery store.

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The Morning After! US Treasuries Surge, Mortgage Rate Spread Highest Since Q4 2008

It is the morning after the Fed panicked and lowered its lower bound for The Fed Funds Target rate to … 0%. Here is Fed Chair Jerome Powell calling to The Fed to take evasive action!

The result? US Treasuries yields are falling like a rock. US Treasury 10Y yields are down around 20 basis points this morning.

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And unless lenders lower their 30-year mortgage rates, the spread between Bankrate’s 30 year average mortgage rate and the 10 year Treasury yield is at its highest level since Q4 2008, the epicenter of the financial crisis.

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This morning before the US equities markets open, Europe is already down around 7% – 8%.

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Here is Fed Chair Jerome Powell wishing us all the best!

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LOIS (LIBOR-Overnight Indexed Swap) Spread Spikes As Fed Adds $4.5 Trillion To Its Balance Sheet

Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap)  widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!

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The Federal Reserve has reversed course on its balance sheet unwind, but the reversal  started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.

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Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.

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Treasury Repo collateral has spiked recently.

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And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,

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leading to a steepening of the Treasury yield curve.

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Treasury volatility is on the rise again.

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The coronavirus is NOT a good thing.

Yes, coronavirus fears are sweeping the globe.

But The Fed drives me crazy!

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Vanilla (Swap) Sky! FRA-OIS Spread Highest Since Q1 2009 (Dow Up Almost 10%)

The spread between forward rate agreements (FRA) and overnight indexed swaps (OIS) just spiked to the highest level since Q1 2009.

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A vanilla interest rate swap is an agreement between two counter-parties to exchange cashflows (fixed vs floating) in the same currency.  This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa.

The payments are made during the life of the swap in the frequency that is pre-established by the counter-parties.

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Here is Tom Cruise wearing his Coronavirus mask from Vanilla Sky.

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Good news! The stock market is up almost 10%, the exact opposite of yesterday.

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