Bond Markets Pile Rate Cut Pressure on Fed as Global Stocks Plummet

Benchmark 2-year Treasury note yields slipped under 1% Friday, while interest rate futures added further pressure on the Fed to cut rates as coronavirus fears trigger the fastest stock market correction on record.
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The Federal Reserve was under renewed pressure to support markets, and a slowing domestic economy, with interest rate cuts Friday as benchmark bond yields continued to tumble as coronavirus fears trigger the fastest stock market correction on record.

Benchmark 2-year note yields, which are usually the most sensitive to near-term interest rate changes from the Fed, slipped below the 1% mark for the first time ever Friday, to 0.951%, extending a decline that has loped more than 45 basis points from the paper since the start of the month. 

With Moody's Investors Service warning of the potential for a coronavirus-lead global recession, supply chains disrupted by China's ongoing health crisis and the lingering effects of its trade war with the United States and government bond yields around the world testing fresh all-time lows, risk appetite was in short supply Friday, with gold price rising, oil extending declines and fund manager cash piles expanding.

Ten-year notes, meanwhile, touched a fresh all-time low of 1.157% in overnight trading as investors extended bets on a Fed rate move following yesterday's stock market plunge - the biggest point decline on record for the Dow and a move that took the S&P 500 into its fastest correction in history. 

"The speed of the drop in stock prices, and the accompanying sharp deterioration in credit markets, is what matters," said Ian Shepherdson of Pantheon Macroeconomics, who thinks the Fed could respond to market conditions even before its next scheduled meeting on March 17. "The degree of tightening of overall financial conditions is now approaching the crunch seen in late 2018, but it has happened over just four days, rather than three months. "

"If this doesn't have all the alarm bells ringing at the Fed, it's hard to know what would," he added.

However, while CME Group futures prices suggest traders are pricing in a least a 77% chance of a March rate cut -- up from just 9% last week -- and benchmark bond yields tumble to fresh all-time lows, Fed officials don't appear as eager to capitulate to the market's demands.

"I think it would be premature until we have more data and have an idea what the forecast is to think about monetary policy action," Chicago Fed President Charles Evans said on the sidelines of a financial conference in Mexico Thursday. "But we’re monitoring it very closely and if we see something that does require adjustment I’m confident that we will give that all the consideration that it needs." 

European Central Bank President Christine Lagarde, meanwhile, told London's Financial Times Thursday that only a "long-lasting" shock to the economy from the coronavirus would compel the Bank to alter its current stance. which includes a near-zero base rate and a negative charge of 50 basis points on its overnight deposit facility. "We are certainly not there yet," she added.

Rate cuts, typically, have little effect on supply shocks to both domestic and global economies. However, extended shocks can bleed into reduced demand, and lower rates would ease both credit conditions and allow companies to fiance working capital to carry them through a near-term trough, Shephderson argues, while signaling a willingness to support business conditions.

ING's head of global debt and rates strategy, however, isn't so sure monetary easing is the panacea markets are craving.

"The only logical rationale for an imminent interest rate cut is for the interests of financial market stability e.g. a case where the equity market sell-off turned into an uncontrollable rout," he said. "Beyond that, interest rate cuts will neither cure anyone’s flu, nor avert close-down risks for areas that have or will become Covid-19 impacted."