Bonds Yield To Covid-19

When the global pandemic was just beginning to spread outside of China in early February, most expected multiple Federal Funds Rate cuts. However, nobody expected interest rates to yield so quickly to fear from the COVID-19 virus. Despite a massive 150 basis point cut in Fed Funds from 1.5% to zero in just 11 days, along with massive fiscal stimulus, stock and bond markets continue to panic. The last time the Fed Funds interbank borrowing rates were pushed to 0% was late in the Great Recession of 2008 – 2009. Back then our economy (GDP) was contracting at a 4% rate. This biologically infected GDP is currently witnessing far less economic activity than 2008 as of March as mandated by Government. With no clarity on the demise of this pandemic, it’s understandable that investors will continue to discount increasingly dire scenarios until COVID-19’s spread begins to wane.


When the vaunted German economy began selling 10 Year Bonds with negative yields in April 2019, the faster-growing US economy still had its 10 Year Bonds with a robust 2.5% yield. The US could brag then that the sickness of negative yields – paying investors to borrow money – would never happen, that is until the COVID-19 pandemic deflated our economic balloon and sent the 10 Year to just a third of one percent yield. The US has been the cleanest of the dirty shirts by avoiding negative-yielding bonds, but that may soon change as the Fed is forced to buy bonds to provide liquidity and avoid a banking panic. Major companies are now maxing out their credit lines and terminating share buybacks for raising cash to battle the Coronavirus shutdown. This era of low yields is good for servicing debt loads, but hardly a panacea in sustaining marginal businesses. Many workers living from paycheck to paycheck employed in small companies or as independent contractors will see little to no benefit from cheap credit, avoiding payroll taxes or extended sick leaves funded by the Government. A small silver lining is the eventual flood of mortgage refinancings once the dust settles from the COVID-19 Bomb that is cratering the economy. The 15 Year Mortgage rate has fallen under 3% but could drop close to the 2% range in the weeks ahead.

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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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