Pro Perspectives 3/20/20

March 20, 2020

We've talked in recent days about the troubling U.S. Treasury market.  This is the most important market in the world, and it has been broken since last week.

So as we watch the back and forth in stocks, and follow the ebb and flow of the virus, it's the bond market that is most important right now for stocks (and the global financial system).  

As we've discussed, in a world of fear and uncertainty, global capital historically flows into the U.S. Treasury market (buys U.S. government bonds), the deepest, most liquid market in the world.  Why? If you're a Russian billionaire or an Asian sovereign wealth fund, when the world appears to be imploding, you have the best chance of seeing your money again by betting on the full faith and credit of the U.S. federal government. 

That said, over the past two weeks, as the global crisis heightened, bond prices have been going down, not up, and that has driven U.S. government bond yields up (as you can see in the chart) — which has been a flashing red emergency signal. 

In a time when the Fed is trying to force borrowing rates down, the Treasury market is doing the opposite for things like mortgage rates.  You can see in this next chart, with the Fed now at zero on the Fed Funds rate, mortgages should be going for 2.5%, if not 2.25%.  The average this week was 3.74%.  

What has caused this disconnect in the bond market?  As we've discussed this week, a lot of that has to do with 1) blow up of a few hedge funds, and the subsequent liquidations of positions that had been working for them (i.e. forced selling of their long bond positions), and 2) global central banks have been desperately selling Treasuries to meet the demand for U.S. dollars from their financial insitutions. 

The Fed went to work on this problem last week, and threw more at it Sunday night, and even more this week — to combat a U.S. Treasury market that was lacking buyers.  Remember, the Fed has the printing press, so this is a battle they will win.  

The good news, with the behavior yields today, they may have won the battle.  Yields finish the day back below 1%, and down 40 basis points on the day from the highs – settling at 88 basis points.  This should be a very good signal for markets coming into next week.

If you have any comments or feedback, I’d love to hear from you:  You can email me at