Yields Race to the Zero Lower Bound

Mar 09, 2020
NYSE Floor

Apparently We Can Go Pretty Low

If anyone thought the late February stock sell-off would be a one and done development the week just past, and this certainly morning, have cracked that illusion big-time. Historic moves are in store this morning with the 30-year bond moving overnight to a low yield of 0.70% and is currently yielding 0.88%. That’s a 12 point price move when moves of 1 or 2 points are normal. The 10-year yield moved overnight to a low of 0.31% and is currently yielding 0.45%.  Fed funds futures are pricing in a 75bps move by the March 18 meeting, but the Fed may be compelled to move early given the market turmoil. The overnight move was catalyzed by an oil price war between Saudi Arabia and Russia. The lack of an agreement to limit output sent oil spiraling lower to $31.55 a barrel, down $9.73 from Friday’s close and the lowest level in four years. The ongoing spread of the coronavirus and lack of a coherent response is moving markets as well. Stock markets are poised to lose 1,200 points as the risk-off trade has accelerated to another more volatile level. Suffice it to say, we are in store for an historic week of market moves across all sectors, one driven by fear and the certain but unknown negative impact it will have on economic growth, both domestically and globally.


Treasuries
Treasury Curve Today Week Change
3 Month 0.23% -0.92%
6 Month 0.20% -0.75%
1 Year 0.17% -0.67%
2 Year 0.29% -0.51%
3 Year 0.33% -0.47%
5 Year 0.37% -0.48%
10 Year 0.45% -0.62%
30 Year 0.88% -0.75%
Short-Term Rates
Fed Funds 1.25%
Prime Rate 4.25%
3 Mo LIBOR 0.90%
6 Mo LIBOR 0.88%
12 Mo LIBOR 0.85%
Swap Rates
3 Year 0.462%
5 Year 0.483%
10 Year 0.542%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Mar 10 NFIB Small Biz Optimism Feb 102.7 102.9 104.3
Mar 11 CPI (MoM) Feb 0.0% 0.0% 0.1%
Mar 11 CPI Ex-Food & Energy (MoM) Feb 0.2% 0.2% 0.2%
Mar 11 CPI (YoY) Feb 2.2% 2.2% 2.5%
Mar 11 CPI Ex-Food & Energy (YoY) Feb 2.3% 2.3% 2.3%
Mar 12 PPI (YoY) Feb 1.8% 1.8% 2.1%
Mar 12 PPI Ex-Food & Energy (YoY) Feb 1.7% 1.7% 1.7%
Mar 13 U. of Mich. Consumer Sentiment Mar P 95.0 95.0 101.0
Mar 13 U. of Mich. Expectations Mar P 88.1 88.2 92.1

calendar icon Top 5 Events for the Week

March 9-13, 2020

1. Coronavirus Developments – All Week
2. February Inflation Readings — Wed./Thurs. 
3. March U. of Mich. Consumer Sentiment – Friday
4. February NFIB Small Biz Optimism – Tuesday
5. Weekly Initial Jobless Claims – Thursday

 

1.  Coronavirus Developments - All Week

If anyone thought the late February stock sell-off over the coronavirus scare would be a one-week development last week cracked that illusion big-time. Except for Monday and Wednesday it was a global risk-off event as news of spreading virus cases sent stocks and Treasury yields lower. Treasury yields have moved to new all-time low yields on the longer end as a flight-to-safety trade is in full effect. Once again, coronavirus developments will drive trading more than any single economic release this week. The continued uncertainty around the virus and its eventual course will continue to hang over the market, and that’s likely to keep yield levels from bouncing much from the extreme lows we’ve reached.  A fiscal stimulus package could stem the one-way trade but nothing like that seems to be in the offing.

 

2.  February Inflation Readings –Wednesday/Thursday

Recent tame inflation readings and comments from several Fed officials that the 2% benchmark should be thought of as a symmetrical target has pushed the importance of the monthly inflation readings down a notch or two, and certainly with the coronavirus scare they become even less consequential.  That being said, February CPI is expected to be another modest month as far as inflation is concerned. Expectations are for a flat read versus January. The core rate (ex-food and energy) is expected to increase 0.2% matching the prior month. On a year-over-year basis, CPI is expected to decrease from 2.5% to 2.2% while core CPI YoY is expected to remain at 2.3% for a second straight month.    With the Fed’s preferred cost gauge, core PCE, currently at 1.5%, it looks like inflation will remain docile enough to allow the Fed to cut rates given the recent volatility and concern over a virus-induced economic slowdown.

 

3.  March University of Michigan Consumer Sentiment —Friday

The March University of Consumer Sentiment will be one of the first that embodies information after the brunt of the late February stock losses and increasing coronavirus infections stateside. Consumer confidence had been strong of late what with the wage and job gains but the preliminary March read is expected to print 95.0 versus 101.0 in February.  95 would be the lowest read since October.  The report also provides an outlook on expectations and that’s forecast to decline from 92.1 to 88.2. That would be the lowest since November. Thus, a hit to confidence and expectations is forecast, and that’s to be expected, but the outlook doesn’t signal a complete reversal of confidence and that may stem some of the expected selling in risk assets if those expectations are met.

 

Consumer Sentiment and Expectations

 

4.  February NFIB Small Business Optimism —Tuesday

Along with the University of Michigan Sentiment Report due Friday, the NFIB Small Business Optimism Survey tomorrow will be viewed for any cracks in sentiment just as the virus threat started to appear stateside. The report this week is from February so a bit dated at this point, and before some of the worst stock volatility hit, but the report is expected to see a small decline from 104.3 in January to 102.8. If the drop is more severe than expected it will support the ongoing bid in Treasuries while a better-than-expected reading will be discounted somewhat as occurring before the worst of the shift in market sentiment.

 

5.  Weekly Jobless Claims–Thursday

We don’t normally include weekly data series here but with all eyes on the coming impact of the coronavirus this one will get increasing attention. Jobless claims haven’t been dinged yet but expectations are that we’ll start to see it lift in the coming weeks. A key point here is that leisure and hospitality jobs will be some of the ones first ones to go, but many of those are not eligible for unemployment compensation.  Thus, it might look decent in claims country for a few weeks still, but definitely keep an eye on it for some lift. The expectation this week is for claims to remain stuck around 216,000.

 

 


bar graph icon  Yield/Duration Opportunities

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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