Two things are common among virtually all of our clients in the current economic environment. One, is that there is an uncomfortable level of Earnings pressure. The other is that banks currently have more liquidity than they have had in decades. The first condition is obviously bad. The second is more ambiguous.

Something has gone haywire in the Government Securities Markets. This is apparent to everyone, but especially to those who follow the Markets closely.

Most of the media attention is focused upon the Stock Market, which has been cascading lower at a significant pace.

For those watching the Market closely, they are aware that the Government Securities Market took an extremely peculiar turn on Monday and Tuesday of this week.

After reaching an all-time low yield of 0.38% on Monday afternoon, the Market began to increase and has remained relatively stable at around the 0.75% - 0.80% level.

This made absolutely no sense, given the rapidly escalating concerns about the coronavirus and the increasing probability of additional Fed action at their March 18th meeting. So there must be some other force or dynamic at play which is not necessarily obvious. After some detective work, I think that I may have discovered two, actually.

Today we reached a definitive milestone, as it relates to the 10yr / 2 Yr Inverted Yield Curve.

​Although it has inverted several times during the past week, the inversion has been for only a short period of time.

This is not something that we are projecting, and it is certainly not something that we are advocating, but there is increasing talk among US official about the possibility of a Negative Interest Rate Policy in the United States, most recently by the President of the New York Fed.
 
With the outlook for the US Economy at least having strong headwinds in the future, it is wise to realize that the Fed just does not have enough “firepower” (just 200 more basis points, compared to a traditional 400 bp’s plus) to get a recessionary economy turned around with traditional Monetary Policy tools.

We have clearly experienced a “sea change” as it relates to Rates during the past few months. This is evidenced by the fact that virtually all sectors of the US Treasury Yield Curve, beyond one year, are down by 125 – 150bps.

The Fed’s recent decision to lower the Fed Funds Rate by 25bps is just the latest episode in the drama that has been playing out, especially over the past few months.