As the public health and economic fallout from Covid-19 continued, U.S. Treasury yields traded in a reasonably tight range during May. Ten-year yields stayed within a 12-basis point (bp) band, while 30-year yields kept to a 20 bp range. Twenty-year notes were issued by the federal government for the first time in many years, and the market gave the new paper a warm reception.  Ultimately, the 2- to 30-year yield curve slope steepened by 16 bps, as the short-end of the curve remained firmly anchored.

Federal Reserve Chair Powell indicated that they would use whatever tools available to support the economy during the COVID-19 pandemic. Concurrently, Congress and the administration continued to add to their dramatic fiscal response.

As of this writing, there have been no new fiscal programs enacted since the Phase 3 CARES Act on March 27. Congress spent a portion of last week debating an expansion of the CARES Act. The Senate finished the week at an impasse, attempting to add $250 billion to the Paycheck Protection Program (PPP). Democrats sought more money for hospitals and state and local governments in exchange for passing a Republican proposal for more small-business loan funding.

In these quarterly pieces, we typically review the events - primarily economic events - of the past three months, their impact on the fixed income markets, and how our portfolios have been positioned. Today, we want to begin by expressing our fervent wish that you, our clients, friends and your families, are healthy and safe. The first three months of 2020 have been like no other.

Over the past month, there has been a flood of monetary and fiscal programs enacted and proposed globally. The focus has been on mitigating the damage to individuals and businesses (and supporting a faster recovery once economic factors and markets stabilize), while trying to facilitate some form of functioning capital markets. 

There has been significant turmoil year-to-date in the financial markets as fear rises over the spreading COVID-19 and its uncertain impact on global economic growth. Equities have fallen at an unprecedented rate, erasing $20 trillion in global wealth over the past three weeks, while U.S. Treasuries have rallied dramatically. Ten-year yields have fallen to record lows (at one point this month hitting 0.32% intraday). Within the bond market, all “risk” has sold off, including corporates, securitized product, and high yield bonds. Until last week, bond market trading remained orderly with only pockets of illiquidity. That changed last Thursday as trading costs of even the current and off-the-run (older issues) U.S. Treasuries rose and have continued to rise at the start of this week.

Interest rates declined precipitously in February as a result of the spread of Covid-19 worldwide. U.S. Treasury rates reached new lows at the end of the month, with the 10-year yield at 1.12%, having fallen some 50 basis points from its peak for the month (Feb. 5). By month end, the market priced in a Fed funds rate cut of 50 basis points (bps), causing the spread between Fed funds and two-year yields to widen to levels reminiscent of the financial crisis.  

Turmoil may not be a strong enough word to describe this past week in the financial markets. U.S. equities have fallen at an unprecedented rate, resulting in a loss of over $5 trillion of value from its peak (14% of market value).

January was characterized by a significant rally in the U.S. Treasury market.  Ten-year yields fell by 41 basis points (bps) and the 2-year yield declined 24 bps. The yield curve flattened with the 2- to 10-year spread falling to 17 bps and the very short-end of the curve actually inverted. The 30-year bond yield declined substantially although failing to keep pace with the 10-year, leading to a very modest steepening of the long end of the curve.

The tide turned on interest rates in the fourth quarter of 2019. The 10-year U.S. Treasury note yield reached a low for the year in September, hitting 1.46%. In October, the Federal Reserve cut rates for the final time in 2019. The market responded by taking a more measured view over future rate moves, with many if not most participants believing that the Fed will be on hold in 2020.