(Bloomberg) — Bond investors are looking for orientation points this week in a fog of panic that’s paralyzed parts of the world’s biggest and safest debt market.Roughly $340 billion of Treasuries are on the way. That burst of supply could help a market starved of high-quality securities if it lands in less chaotic conditions. But there’s hardly any guarantee of that: The 10-year yield, a benchmark for global borrowing costs, swung in a range of more than 50 basis points in each of the past three weeks, a phenomenon that hasn’t been seen in the past two decades. Rates-market volatility is not far below a post-2009 high reached this month, and illiquidity still reigns, as seen in shrinking futures open interest.The days ahead are unlikely to bring much in the way of settling news. Yields pitched lower Friday as more governors ordered residents to stay home to curb the spread of the coronavirus. And investors are also braced for data that will help them piece together the economic fallout.Forecasts for the coming quarters are alarming — Goldman Sachs Group Inc. sees a “sudden stop for the U.S. economy” that will cause an unprecedented 24% contraction in annualized growth next quarter. Federal Reserve Bank of St. Louis President James Bullard, meanwhile, predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.“The market is stuck not just because of general illiquidity, the market is stuck because people want to trade on macro fundamentals, and those are still very, very difficult to define right now,” said Seth Carpenter, an economist at UBS and a former Treasury official.The picture taking shape is one of a rapidly crumbling U.S. economy. Reports on both manufacturing and services are expected to show contraction in March. Thursday brings jobless claims, which are forecast to have more than quadrupled from the previous week to a record above 1 million.The market’s reaction will be a useful gauge of how much damage traders have already priced into rates, said Lauren Goodwin, an economist and multi-asset strategist at New York Life Investments.The 10-year Treasury yields 0.85%, after tumbling about 30 basis points Friday in its biggest one-day decline since 2009. It’s still up from a record low of 0.31% set March 9 as global governments pledged trillions of dollars of economic stimulus, and as some investors unloaded even the safest assets to generate cash.In foreign-exchange markets, early moves in Asia-Pacific trading Monday were cautious, with the dollar holding near its closing levels from last week against the euro and yen.One consolation for investors coming into this week is that central banks have pulled out all the stops. The Federal Reserve has rolled out a series of actions to help stave off a liquidity crisis. Just since last Sunday, its steps include slashing interest rates to near-zero, injecting billions of dollars into funding markets, purchasing $272 billion of Treasuries and reviving a string of crisis-era programs to help companies and banks get cash.Goodwin doesn’t doubt the ability of monetary authorities to keep funds flowing through the financial system. But she’s concerned the volatility that’s caused a stampede out of corporate bond markets could trigger insolvencies.“Central banks have signaled very strongly that they are all in,” she said. “The Fed is trying to heal the central nervous system of the market, but the crisis didn’t start there, the crisis started in the real economy because of this shutdown.”That’s why all eyes are on U.S. lawmakers, with investors looking toward a potential vote this week on a much-anticipated economic rescue package.“One of the biggest calming impacts on the markets will come from the fiscal policy side,” Goodwin said.What to WatchLawmakers take the spotlight, with a vote looming on a promised spending package. And the push and pull of Treasury auctions and Fed purchases will keep traders busy.Here’s the economic calendar:March 23: Chicago Fed national activity indexMarch 24: Markit U.S. manufacturing, services, composite PMI surveys; new home sales; Richmond Fed manufacturing indexMarch 25: MBA mortgage applications; durable, capital goods orders; FHFA house price indexMarch 26: Advance goods trade balance; wholesale, retail inventories; GDP; core PCE; jobless claims; Bloomberg consumer comfort; Kansas City Fed manufacturing activityMarch 27: Personal income and spending; PCE deflator; University of Michigan sentiment surveyAnd the auction schedule:March 23: $45b of 13-week bills; $39b of 26-week billsMarch 24: $26b of 52-week bills; $40b of 2-year notesMarch 25: $18b of 2-year floating-rate notes reopening; $41b of 5-year notesMarch 26: 4- and 8-week bills (last week totaled $100 billion combined); $32b of 7-year notesFedspeakers are grounded, with St. Louis Federal Reserve President James Bullard canceling planned speeches in Europe.(Updates currency trading, adds Bullard.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) — The Federal Reserve has a lot to worry about these days. And while it’s not often mentioned, at the top of the list should be preventing rates on longer term U.S. Treasuries, the world’s risk-free benchmark securities, from falling to zero.Treasuries play a critical role in providing ample liquidity to the global financial system because they are a manifestation of the dollar’s reserve currency status. As such, they are the most important store of value and a critical hedging instrument for global market participants. The Treasury market is also the primary vehicle through which the Fed transmits monetary policy.But if yields on benchmark 10-year Treasury notes go to zero — a no longer ludicrous suggestion after Russia walked out of the OPEC+ meeting without a deal — then all of those key roles get upended. Especially hard hit will be banks, insurers and pension systems worldwide.The business model of banks is predicated on borrowing at low short-term rates and lending the proceeds at higher long-term rates. But if the gap between short- and long-term rates evaporates, lending would come to a standstill, especially if this were to happen with nominal yields falling to zero. As for pensions and insurers, they need returns of 6% to 7%, which they are definitely not getting from their holdings of stocks or credit-related securities these days. The need for potential bailouts of pensions would become a very real prospect for federal authorities.But the Fed can take preventative measures that go beyond just cutting interest rates. In fact, the central bank should reach into its toolbox and put a floor under long-term yields. Recall that in September 2011, then Fed Chairman Ben S. Bernanke employed a strategy dubbed Operation Twist under which the central bank used the proceeds from maturing short-term bills and notes it held on its balance sheet to buy longer-term Treasury notes and bonds in order to narrow the yield curve. The program was so successful that 10-year Treasury yields dropped to what was then a record low of less than 1.50% in mid-2012.The Fed should now do the opposite, though while still maintaining its intent to ease monetary policy. Call it Operation Reverse Twist with a quantitative easing kicker. The first step would be for the central bank to conduct auctions to sell its holdings of longer-term bonds in coordination with the Treasury Department. At the same time, the Fed would buy more Treasury bills and short-dated notes than it is selling from its portfolio of longer-term securities.This would still be a net easing of monetary policy but with the aim of boosting long-term yields and preserving the integrity of the financial system. To be sure, this plan isn’t without risk. If the public interpreted the Fed’s sales of long-dated holdings as any form of tightening, that would put further pressure on equities, credit markets and other riskier assets. Current Fed Chair Jerome Powell and his colleagues would have to form a unified communications front, which is something that could prove tricky for a central bank not known for its clear messaging.It’s time for Fed officials to conceive a plan to combat nominal Treasury yields from falling so low that they threaten the global financial system. Powell must recognize that no two crises are alike, and what worked before may not work now.To contact the author of this story: Danielle DiMartino-Booth at firstname.lastname@example.orgTo contact the editor responsible for this story: Robert Burgess at email@example.comThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America," and founder of Quill Intelligence.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.