It seemed like an odd, counterintuitive market reaction to what was total chaos. First the news of Lehman Brothers followed closely by AIG, panic gripped every corner of the global marketplace. Toward late September 2008, the stock market would meltdown (the main part of GFC1 that most people associate with the term) in a wave of liquidations due to a global dollar shortage that would last through October 10 in its most acute stage.

During that time, though, bond rates at the long end of the curve moved higher. TIPS yields, too. Was the inflation market trying to say that global and US growth prospects were rising? That would’ve been the literal interpretation of the behavior of “real” yields.

It played hell with inflation expectations. As real rates drove upward much faster than nominal Treasury yields, inflation breakeven points plummeted. That part, at least, sounded like what you would have expected from a crisis – a deflationary event if there ever was one.

There were also differences between maturities; the 5-year TIPS, for example, was much more energetic in its surge of real rates compared to the 10-year. With rising real yields going up at different speeds, as well as differences in the behavior of nominal Treasuries in between, inflation expectations were all over the place.

Long run expectations (the 5-year/5-year forward inflation rate) at first fell and then surged (once the stock market liquidation had ended) before collapsing, skyrocketing, and then collapsing yet again.

During all this, the federal government was initiating TARP and then changing what TARP meant all the while the Federal Reserve was coming up with new “monetary” programs seemingly by the day. No wonder all the confusion, brand new interventions about which most people had no idea what to think. Or believe.

Don’t fight the Fed and the feds?

Well, markets had just melted down so the Greenspan put wasn’t exactly thought of in the most glowing of terms. There was, however, the nontrivial matter of what would come next. Was it inflation and a rapid return to growth, a “V” recovery that seemed to be indicated by long run inflation expectations?

No. Of course not. The TIPS market had become unreliable as a consistent signal due to illiquidity in that market, too. It wasn’t just stocks which were hit with fire sales. Even nominal UST’s as well as TIPS at the long end suffered during the worst part of GFC1 (while there was no shortage of buying in OTR bills, which sounds very familiar).

As these went haywire, they also had to come back and then normalize to a very different landscape.

Therefore, rising “real” yields weren’t the bond market signal for effective monetary and fiscal responses, they were quite the opposite indicating just how futile these had been. And for a time, a real mess in rates and inflation expectations performing erratically and sometimes inversely to what actually was happening.

It wouldn’t be until early December that things would calm down in TIPS at least. By then, the market was more decided about the future – unfortunately for Ben Bernanke, John McCain, and the rest of the world. No rising growth prospects, only disinflation over the long run despite “massive” “money printing.” It was enough then to have suspected the Fed was a gigantic monetary fraud.

The mess in TIPS isn’t quite as intense this time around during GFC2; then again, all signs point to more of this yet to come. Particularly the “money printing” fraud.

The fiscal side is likewise familiar; the only difference between the cash payments from the Treasury in 2020 versus those handed out in 2008 is the amounts. There may not be a second TARP this time around but most of the same impulses are being captured in what Jay Powell is attempting (trying to backstop markets rather than thinking there is a need to backstop banks in order to backstop markets; neither is working out very well).

Either way, when it comes to inflation expectations the long run forward rate had been rising because of the differences in curve behavior between TIPS maturities. Just like 2008.

For so much “money printing” where’s the expected inflation? Conspicuously absent from breakevens that remain historically low.

Rather, the market as others continues to lean on the side of another wave of prospective illiquidity. While some market “experts” continue to laud the Fed for its efforts (somehow congratulating policymakers for coming in after it was all over and claiming to have saved the system from it being worse) market prices in eurodollar futures point to serious ongoing uneasiness.

LIBOR rates are coming down, but curiously taking their sweet time in doing so. As I mentioned before, it doesn’t matter that LIBOR is moving downward what matters is how quickly. You’d have thought with the Fed’s absolute “flood” of “liquidity” going back to last month this would all have become a distant memory long before now.

A couple trillion in assets purchased, a trillion in additional bank reserves and a full month in between. Why is LIBOR still closer to its highs than the ZIRP course set out for it? To ask the question is to answer it.

Furthermore, eurodollar futures continue to price elevated spreads now beginning to shuffle up next year. In today’s trading, for example, the front end of the curve mildly sold off – all the way into early 2021. It’s been trading this way for the past week, with the back end being bid (long run damage; or, a more likely and deeper “L” as hopes for the “V” fade).

In other words, during times of real chaos the Fed can and does take advantage of it to set up and further its narrative. But it doesn’t last; it can’t last because it’s nothing more than a narrative. Eventually, when things start to settle back down again it’s because the market(s) realizes the chances of it staying settled down are practically none.

April is nowhere near as chaotic as March, and that’s the bad news. A true flood of liquidity wouldn’t end up looking anything like this.