First cut is the deepest?
Feb 25, 2020
–SPX fell 3.35% and Nasdaq 3.7% as coronavirus and Bernie fears gripped the market. Ten year yield plunged nearly 10 bps to end near record lows at 1.372%. 30y bond fell 8.5 bps to 1.832%. The ten year inflation-indexed yield closed at -22 bps, a level not seen since before the 2013 ‘taper tantrum’. Tip breakeven at 1.592, a new recent low.
–As Bloomberg’s Macro Man said yesterday, “…can we really expect monetary policy to save the day when the yield on junk bonds is more or less at all time lows?” Probably not, but the Fed will try to cushion the blow, knowing that supply chain disruption is spreading. In any case, some trades are occurring to fade prospects of Fed easing. For example, a buyer yesterday of over 100k EDZ0 9837/9825/9812 put fly for 2.0 to 2.5, settled 1.75 vs 9875.5.
–April Fed Funds settled 9845.5 vs Feb at 9841.75, so the market is assigning small probability of a March ease. Of course, another IOER upside tweak could also be playing into the April price. The March FOMC is three weeks away, a large enough window for virus events to expand or abate. The two-year treasury yield currently has over 30 bps of negative carry at 1.26% (there is a 2-yr auction today). FFG0/FFG1 settled -61.25 bps, so the market is now projecting 2 or 3 cuts this year. EDH0/EDH1 settled -48.0, a new recent low. The first FF contract that exceeds the Feb price by more than 25 bps (i.e. that prices the first ease) is FFN0 or July, at 9868.5. So June 10 is the target FOMC meeting. Worth noting that Aug FF, FFQ0 is 9877.0, so there are pretty high odds for an ease at the July 29 meeting as well.
–Clarida speaks again today.
