The Impact Of The Covid Economic Shutdown On The Yield And Dollar Swaps Curve (Mortgage Rates Down Over 100 Basis Points Since 03/13/20)

The various state economic shutdowns, particularly devastating to small businesses such as non-chain restaurants, has taken a serious toll on the US and global economies.

We can see the effects in the US Treasury Actives and US Dollar Swap curves. Compared with 03/02/2020, both the Treasury yield and US Dollar Swaps curve have steepened on the short-end.

Residential mortgage rates in the US have fallen over 100 basis points for the 30Y Fixed-rate mortgage. Mortgage rates are converging to near 3%.

And bond volatility has declined to an all-time low with The Fed’s rapid monetary expansion.

I guess Fed’s Jerome Powell is Mr Freeze!

Bond Volatility Flags U.S. Election as Event Risk of Decade (Fed Hammers Down Volatility With QE Infinity)

ICE BofA MOVE 1-, 3-month indexes spread highest since 2013
Trump election, positioning, postal voting elevate volatility

(Bloomberg) — Treasury options markets are pricing the Nov. 3 U.S. presidential election as one of the biggest isolated event risks in at least a decade.

The ICE BofA MOVE Index, which measures expected swings in Treasury yields across the curve, shows the spread between one- and three-month indexes rising to a level seen only once in the past decade. The latter captures the election between President Donald Trump and Democratic nominee, Joe Biden.

Investors’ nervousness about the potential for short-term turmoil can be seen in cross-asset volatility, particularly spreads for FX and Treasuries. Outside the U.S., the election is also starting to stress investors in the emerging world, and strategists and investors are urging caution as implied volatility rises.

The options markets on interest-rate swaps, commonly known as swaptions, also show traders are bracing for aggressive swings. A one-month option on the 10-year swap rates – which doesn’t start till a month’s time – has a terminal breakeven of 17 basis points. That implies a swing of down to 0.51% or up to 0.85%, from current level of 0.68%.

At least the MOVE index has been hammered-down by Fed monetary policy, including yesterday’s dot plot indicating QE Infinity!!!

Fed’s “dot plot” shows a strong consensus for interest rates to stay near zero through 2023

Perhaps the most uninteresting FOMC meeting ever. They did nothing, as expected.

And the new Fed dot plot reveals that The Fed is likely to keep their target rate at near zero through 2023.

Inflation expectations rose after Powell’s speech.

After today’s Atlanta Fed GDPNow real time tracker of 31.68%, it is surprising that the FOMC didn’t raise rates just a little.

Then again, the Rudebusch specification of the Taylor Rule model is calling for a Fed Funds Target Rate of -1.88%.

Of course, there is always the risk that state governors will keep the economy locked-down at least until the election. So we are stuck with 0.25% Snake Juice (aka, Powell Punch).

Update: Well, The Fed’s “good news” that rates will stay near zero for several years wore off quickly.