Mar 26, 2020 - Economy & Business

Bond market returns to normalcy, traders ignore stock gains

Illustration: Rebecca Zisser/Axios

The Treasury market is getting back to normal after the Fed's massive bond-buying announcement earlier this week.

What to watch: Yields on Treasury bills were negative out to three months, closing in the red late Wednesday, as traders continued to favor paying to loan the government money over buying longer-dated bonds.

  • The Fed's QE program and investor pessimism kept Treasury prices rising and yields falling despite hearty gains for U.S., European and Asian stocks.

Major key: Treasuries have seen a significant decline in the bid-ask spread on prices for notes and bonds since the Fed took action.

  • "The bid-ask spread on benchmark U.S. 10-year Treasury notes had widened as much as 200 basis points on March 20, but narrowed to within a range of six basis points or less on Wednesday, according to Refinitiv data," Reuters' Gertrude Chavez-Dreyfuss and Ross Kerber noted.

Go deeper

Quantitative easing's return sends bond yields soaring

Data: Investing.com; Chart: Axios Visuals

Longer-dated U.S. Treasury yields have bounced higher in recent days, with the benchmark 10-year note fully reversing course and rising to more than double its lowest level on Tuesday.

What's happening: The announcement of $1.5 trillion in repo injections on Thursday by the New York Fed followed two announcements about increasing the amount of cash it was injecting in its repo operations this week. The deluge has given yields a significant bounce.

There Is No Alternative to Treasuries

Data: FactSet; Chart: Axios Visuals

The acronym TINA (There Is No Alternative) had long been used to explain why investors piled into U.S. equities, but it may now apply to U.S. Treasuries.

State of play: After Monday's sell-off, the S&P 500 has erased all of its gains dating back a year, and the dollar, emerging market equities and oil are all negative during that period.

The market is already pricing in a U.S. recession and QE from the Fed

Data: U.S. Treasury; Chart: Axios Visuals

The U.S. fixed income and Fed fund futures markets are not only pricing in a U.S. recession and the Fed cutting interest rates to zero, they are now pricing in quantitative easing and asset purchases, analysts tell Axios.

What's happening: After U.S. 10-year yields fell to 0.32%, their lowest level on record, and yields on the 30-year bond dropped to 0.72%, investors began pricing in a bond-buying program from the Fed that would target longer-dated Treasuries.