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. 

Rates rose as the month began, only to move back as the month progressed. Ultimately, the yield curve had a modest “bearish flattening” for the month with 2-year Treasury yields rising 9 basis points (bps), while 30-year yields increased by only 2 bps. The 2- to 10-year yield spread was virtually unchanged.

October featured a “more of the same” theme with respect to domestic economic data and news. The Federal Reserve cut the Fed Funds rate (as anticipated), the consumer continued to drive the economy, corporate earnings came in higher than expected but continue to decline, wage growth was marginal, and inflation benign. GDP growth for the quarter, at an annualized rate of 1.9%, came in higher than Wall Street anticipated. The trade war pendulum swung towards resolution, with a preliminary deal now expected to be signed in November. BREXIT resolution appeared to be on-again, off-again. 

It might be our imagination, but we seem to recall summers when, as the song goes, living was easy. We fondly remember summer as a time for digging our toes in the sand at the beach, sailing a sunfish on a lake, or maybe enjoying a round of golf at the local course. Not so in 2019, at least as far as the bond markets were concerned. Interest rates took a roller coaster ride. Global economic weakness, negative rates overseas, an inverted yield curve at home, trade wars, Brexit, a shifting Federal Reserve, oil refinery attacks in Saudi Arabia, “repo-madness,” and, to top it off, impeachment inquiries, all made this summer very eventful and made us long for apple picking season come fall.

Treasuries had their biggest monthly gain since the depths of the 2008 crisis.  The 30-year yield fell 56 basis points (bps) to a record low 1.97%, and shorter maturity yields also fell to multi-year lows. The 10-year rate ended the month lower by 50 bps, to 1.50%, and 2-year yield fell 36 bps, to 1.53%, leaving the slope between 2s and 10s, one of the most watched signals of an impending recession, almost perfectly flat.