WASHINGTON–The entire U.S. yield curve fell below 1% for the first time in history as rising expectations that the Federal Reserve will cut policy rates to zero in the coming months drove investors to reach for longer-dated securities.
According to analysis by Bloomberg, investors are pricing in about 80 basis points of cuts in March, and 100 basis points by July, which would drag borrowing costs down to zero.
“Those bets fueled a rally in U.S. Treasuries, with the rate on 30-year bonds diving as much as 59 basis points. Benchmark U.K. bond yields tumbled below zero for the first time, Germany’s two-year bonds and rates in Australia and New Zealand fell to new lows,” Bloomberg reported.
Market Frenzy
The market frenzy is being spurred by concerns over an oil price war between Russia and Saudi Arabia, which prompted the New York Fed to say it will boost the size of this week’s overnight and term repo operations to ensure reserves are ample and reduce the risk of pressures in money markets, Bloomberg said.
“The more I think about it, the more it makes sense to me that the U.S. cash rate will fall below zero some time very, very soon,” Chris Rands, portfolio manager at Nikko Asset Management Ltd. in Sydney, told Bloomberg. “I wouldn’t be surprised if the U.S. tries negative rates, especially with the tailspin in oil now adding to the virus fears.”
Goldman Sachs Group Inc. economists told Bloomberg they now expect the Fed to slash interest rates back to the record low of 2015 as the U.S. economy stagnates because of the coronavirus. Jan Hatzius, Goldman Sachs’s chief economist, forecast in a report to clients on the Fed will cut its benchmark rate by 50 basis points when policy makers gather on March 17-18 and again at their April 28-29 meeting.
Central Bank Action
The Fed has lifted the amount of temporary cash it’s willing to provide markets as pressure intensifies for the U.S. central bank to tackle the risk of a worldwide credit crunch, Bloomberg reported.
“The movements in fed funds futures shows the market is pricing in the chance the Fed slashes rates to zero -- from a range of 1% to 1.25% currently -- by the end of the first-half of the year,” Bloomberg stated. “The implied rate on the July contract, at about 14 basis points, aligns with the base of the Fed’s target rate range being at zero in June.”