This week’s FOMC meeting will be debated for years – perhaps even decades. The Fed essentially pre-committed to no rate hike in 2019. The committee downgraded both its growth and inflation forecasts. Having all at once turned of little consequence, we can now dismiss the 3.8% unemployment rate and the strongest wage growth in a decade. Moreover, the Fed announced it would be scaling back and then winding down balance sheet “normalization” by September. This put an impressive exclamation point on a historic policy shift since the December 19th meeting. At least for me, it hearkened back to a Rick Santelli moment: “What’s the Fed afraid of?”
Markets came into the meeting fully anticipating a dovish Fed. Our central bank returned to the old playbook of beating expectations. In the process, the Federal Reserve doused an already flaming fixed-income marketplace with additional fuel.
After trading to 3.34% during November 8th trading, ten-year Treasury yields ended this week a full 90 bps lower at 2.44%, trading Friday at the lowest yields since December 2017. Yields were down 15 bps this week – 17 bps from Tuesday’s (pre-Fed day) close – and 28 bps so far in March. And with three-month T-bill rates at 2.40%, the three-month/10-year Treasury curve flattened to the narrowest spread since 2007 (briefly inverting Friday). Five-year Treasury yields ended the week inverted 16 bps to three-month T-bills – and two-year Treasuries were inverted about eight bps.
Collapsing sovereign yields were a global phenomenon. Japan’s 10-year JGB yields declined four bps Friday to negative eight bps (-0.08%), the lowest yields since September 2016. With Germany’s Markit Manufacturing index sinking to the lowest level since 2012 (44.7), bund yields dropped seven bps to negative 0.015% – also lows going back to September 2016. Swiss 10-year yields sank 12 bps this week to negative 0.45%. Two-year German yields closed out the week at negative 0.57%. UK 10-year yields dropped 20 bps (1.01%), Spain 12 bps (1.07%) and France 11 bps (0.35%).
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