Fed’s Jerome Powell is watching how low interest rates will go.
Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.
Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).
The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.
How low will interest rates go?
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.
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.
This morning before the US equities markets open, Europe is already down around 7% – 8%.
Here is Fed Chair Jerome Powell wishing us all the best!
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!
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.
Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.
Treasury Repo collateral has spiked recently.
And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,
leading to a steepening of the Treasury yield curve.
Treasury volatility is on the rise again.
The coronavirus is NOT a good thing.
Yes, coronavirus fears are sweeping the globe.
But The Fed drives me crazy!
Well, this didn’t go as The Fed hoped!
(Bloomberg) — The Federal Reserve took aggressive steps to ease what it called “temporary disruptions” in Treasuries, flooding the market with liquidity and widening its purchases of U.S. government securities in a measure that recalls the quantitative easing it used during the financial crisis.
The Federal Reserve Bank of New York said in a statement that the “changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak” and had been done at the direction of Fed Chairman Jerome Powell in consultation with the Federal Open Market Committee.
Under the Fed’s existing program to buy $60 billion a month in securities, the purchases will be widened to include coupon-bearing notes across a range of maturities to match the maturity composition of the Treasury market, it said. (or $1.5 TRILLION)
This is really QE 4 with a NOT! added.
The market reacted by saying “Big whoop.”
Today, the Dow dumped 10% or 2,352.33 points.
As the VIX hit 75, the highest since 2008 and the financial crisis.
Powell tried a “Hail Janet” pass … and it went unnoticed.
At least the US Treasury yield curve lost its sag!
Now this is something you don’t see every day. A true market blitzkrieg at opening.
A 15-minute trading halt took hold after the S&P 500 Index fell 7% to 2,764.21 as of 9:34 a.m. in New York, triggering the breaker for the first time since December 2008 at the depths of the financial crisis.
And the US Treasury 10-year yield plunged 33.3% to 0.429%.
Leaving the entire US Treasury and Dollar Swaps curves below 1%.
Commodities are getting crush too. Thanks in part to Saudi Arabia turning on the oil flow (but not if spot price < extraction cost).
Put skew is in play.
The VIX is at its highest level since the financial crisis.
Where is Jerome Powell and The Federal Reserve?
The Federal Reserve said on Monday that it will increase the amount of money it is pumping into short-term borrowing markets during the current turmoil, reversing an attempt to wean investors off financing it has been providing.
Update at 4:00 pm EST. Dow down 2025 points or 7.83%. For today.