Tuesday, May 12, 2020 |
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| MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris • Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer Nicole Burczyk • Natalie Regan • Aaron Stoffer • Chuck Honeywell |
| US Treasury Market | |||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 05/05/20 | 0.09 | 0.13 | 0.15 | 0.16 | 0.19 | 0.24 | 0.36 | 0.53 | 0.66 | 1.07 | 1.32 |
| 05/06/20 | 0.08 | 0.12 | 0.16 | 0.16 | 0.17 | 0.24 | 0.37 | 0.57 | 0.72 | 1.16 | 1.41 |
| 05/07/20 | 0.10 | 0.11 | .014 | 0.15 | 0.13 | 0.19 | 0.29 | 0.49 | 0.63 | 1.05 | 1.31 |
| 05/08/20 | 0.10 | 0.12 | 0.15 | 0.15 | 0.16 | 0.21 | 0.33 | 0.53 | 0.69 | 1.12 | 1.39 |
| 05/11/20 | 0.09 | 0.12 | 0.16 | 0.16 | 0.17 | 0.24 | 0.36 | 0.56 | 0.73 | 1.16 | 1.43 |
Source: U.S. Department of the Treasury, as of 05/11/2020
LESS THAN ZERO
It definitely grabbed headlines last week when the Fed Fund Futures showed that there was a slight prospect that the Federal Reserve would push interest rates below zero. However many analysts say that the intense pain that it would inflict on the crucial $4 trillion money-market fund industry would do more harm than good.
Money-market mutual funds are a cornerstone of Wall Street’s infrastructures. They are a great source of cash for highly rated companies, banks and municipalities whose short-term issues are purchased by them. That industry’s business model would come under severe strain should rates go negative.
If rates turned negative, money market funds could temporarily lower or eliminate fees like they did during the great economic crisis. It was painful however as industry revenues fell to less than $4 billion in 2013, down from $9 billion pre-crisis. Revenues recovered to $7 billion in 2016 after the Fed finally began to raise rates but here we are again, back to near zero.
Probably the best argument against negative rates was most recently brought up by St. Louis Fed President James Bullard regarding subzero rates implemented by the Bank of Japan and the European Central Bank, ”It is not at all clear that they’ve been successful there”.
The probability of negative rates is small but nothing is off the table at this time, plus the Fed has a long history of “following the market as opposed to leading it”.
Below is the most recent Fed Fund futures screen along with a yield table on new production 20 year mortgage pools. A 1.57% yield to a 6.57 year average life is a whopping 106 basis point spread.
Source: Bloomberg
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