In ancient financial market times (let’s say any time before 2009), a massive economic shock resulted in a pervasive move lower in both stock prices and bond yields. This is a logical way to move away from risk and protect return-on-investment. This dynamic is still very much in play, but it is more complicated in the era of deep involvement by the Federal reserve in open markets.
All that to say Coronavirus caused a very logical move lower in stocks and bond yields, but it has been the Fed’s reaction that is responsible for most of the movement since mid-March. Without the Fed, liquidity and issuance concerns may have meant 10yr yields remained over 1%, or close to it. Stock volatility would certainly be higher and prices would certainly be much MUCH lower.
One can only guess what an alternate reality would look like where the Fed does NOT intervene in an attempt to smooth out economic volatility. History may look back on these attempts as genius or folly. Either way, the Fed is constantly willing to double down on the bet that intervention is a good idea. As such, official communications, such as today’s webcast and Q&A with Fed Chair Powell, have become even more important, even if a bit predictable.
Why predictable? We know the topic of negative rates will come up. It’s come up way too much in speeches from every other FOMC member in the past 2 weeks for Powell not to address it. He will say it’s not happening or at least very low on the list of the things the Fed might do to offer additional support. With that in mind, he will reiterate his stance that the economy will need additional support.
If we’re not cutting rates below zero, that additional support must come in the form of liquidity measures and/or QE (quantitative easing aka Fed bond buying). The bond market is curious (and nervous) to hear any hints about what a permanent phase of QE might look like. In the past 2 months, we’ve only really had “emergency liquidity measures.”
Powell will take the ePodium (is it still a thing to put “e” before words to signify an electronic venue/format?) at 9am ET.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-16 : +0-02
0.6640 : -0.0280
|Pricing as of 5/13/20 8:58AMEST|
|Tomorrow’s Economic Calendar|