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Bond Report

April 9, 2020, 4:03 p.m. EDT

Treasury yields tick lower as Fed deploys ‘M1 tank’ to support economy

By Sunny Oh

U.S. Treasury yields edged lower in holiday-shortened trading Thursday after the Federal Reserve said it would deploy up to $2.3 billion of funds to support the flow of credit in the economy.

The Securities and Industry Financial Markets Association recommended the bond-market close early on Thursday at 2 p.m. ET, and remain shut on Friday in observance of the Good Friday holiday.

See : Which stock markets and other asset trading exchanges are closed on Good Friday? Easter Monday?

What are Treasurys doing?

The 10-year Treasury note yield (XTUP:BX:TMUBMUSD10Y) fell 3.5 basis points to 0.729%.The 2-year note yield (XTUP:BX:TMUBMUSD02Y) was down 2.5 basis points to 0.231%, while the 30-year bond yield (XTUP:BX:TMUBMUSD30Y) edged 1.1 basis point lower to 1.353%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

In a day when the labor-market was expected to command the attention of the broader market, the Fed’s announcement that it could unleash around $2.3 trillion of credit through its emergency lending programs helped to buoy investor sentiment. The programs will now support an even broader array of assets including sub investment-grade corporate bonds and highly rated collateralized loan obligations

On Thursday, Fed Chairman Jerome Powell said that he thinks the economy can snap back once the coronavirus pandemic eases. But he emphasized fiscal stimulus would have a bigger part to play than central bank lending to support a growth bounceback.

Still, economic data underscored the fragility of the U.S. labor market, and the depths from which the economy will have to recover. The latest U.S. jobless claims numbers showed 6.6 million Americans filed for unemployment benefits last week, bringing total job losses in less than a month to 16.8 million.

Analysts and senior Fed officials have cast a wide range of estimates on the expected unemployment rate in the coming months, with some like St. Louis Fed President James Bullard suggesting as high as 30% in the second quarter. Uncertainty about how long lockdowns may last has made it difficult for economists to forecast the path of growth.

See : Another 6 million workers likely filed jobless claims in early April as record layoffs mount

In recent days, signs suggesting a slowdown in the number of infections, hospitalizations and other metrics of the spread of the COVID-19 pandemic have helped to buoy equities at the expense of haven assets like government paper, but the lack of uniform improvement on the coronavirus trajectory across Europe and the U.S. have kept investors on edge.

The pace of the Fed’s buying of Treasurys is set to slow next week to an average of $30 billion per day, from $50 billion per day this week.

Read : The Fed staff’s worst-case scenario: No recovery until next year

What did market participants’ say?

“The bazooka that the Fed deployed has now turned into an M1 tank. The quickness of their response is eye-popping. Expect more Fed action, they’ll do what ever it takes,” said David Albrycht, chief investment officer of Newfleet Asset Management.

“The U.S. economy has had a heart attack. On the fiscal side, the government was trying to do surgery, and the Fed was trying to get rid of the blockages i.e. bringing back liquidity,” said Frank Rybinski, senior investment strategist at Aegon Asset Management.

“The main reason they’re doing all this is that they know the economic fallout and the time spent in social distancing will be more so than what markets are prepared for,” Patrick Leary, chief market strategist at Incapital, told MarketWatch.

Link to MarketWatch's Slice.