Apr 24, 2020

Axios Markets

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🚨 Situational Awareness: "Axios on HBO” is expanding its 2020 season and moving to a new night and time with episodes airing biweekly, starting Monday, April 27 at 11 pm ET/PT on all HBO platforms.

🎙 "The Greeks dedicate this thank-offering to Athena for their return home.”- See who said it and why it matters at the bottom.

1 big thing: The great Treasury market rally
Oprah enthusiastically telling her audience they all get cars. Giphy

The stock market has risen by 25% since the Fed announced its QE-infinity program on March 23, committing to buy an uncapped amount of U.S. government debt for an unspecified amount of time, but 2020 has been all about the surge in U.S. Treasuries.

The big picture: Already seeing a bid this year as bond investors piled in because of early fears about the novel coronavirus and the U.S.-China trade war, long-dated Treasuries have been the world's best performing major asset class this year by a wide margin.

What happened: The Fed's decision to restart its bond-buying program and ratchet its balance sheet to a record $6.62 trillion as of Thursday helped offset a global liquidity freeze and end a mad dash for cash across markets.

  • In addition to propping up the market, that allowed Treasuries to benefit from the collapse in commodities like oil.
  • "It's a continued flight to quality," Seaport Global Holdings managing director Tom di Galoma told Reuters earlier this week. "Investors are looking for a safety asset, and Treasuries happens to be that."

By the numbers: Yields on benchmark 10-year notes have fallen by around 27 basis points since March 23, while yields on 3- and 5-year notes have hit all-time lows this week. (Yields fall as prices rise.)

  • Year to date, 10-year yields have fallen 132 basis points, with 3- and 5-year yields declining by a similar amount.
  • Yields on the 30-year bond have fallen by 121 basis points.

Between the lines: The move in the Treasury market also reflects investors' historically low expectations for inflation, even in the face of record spending by Congress that likely has already pushed the U.S. annual budget deficit over $4 trillion for 2020.

Keep it 💯: That's because the new spending is “unproductive debt,” say Van Hoisington, lead manager of the Wasatch-Hoisington U.S. Treasury Fund, and Lacy Hunt, the firm’s chief economist.

  • “The U.S. had a debt overhang problem even before the coronavirus,” Hunt told Bloomberg. “It won’t be productive debt, and will not generate future growth. So inflationary expectations will turn into deflation expectations, and the entire yield curve is going to be pressed down on to the zero bound.”
  • The Wasatch-Hoisington has earned 29% in 2020, Bloomberg reports — outpacing all its peers and rivaling some hedge funds — by betting on long-dated Treasuries.

The bottom line: The run in Treasuries, especially longer-dated maturities, could have further to go, as expectations for the economy to rebound are pushed out further.

2. Catch up quick

The House of Representatives passed a $484 billion coronavirus relief package that includes $321 billion in new funding for small businesses already passed by the Senate. (Politico)

Some Amazon warehouse workers are expected to call in sick today to protest inadequate employee protections and the company's retributions against those who speak out. (Bloomberg)

Intel stock fell in after-hours trading after it beat earnings estimates but released a second quarter profit outlook that was weaker than expected. (MarketWatch)

Google plans to cut its marketing budget by as much as half and institute hiring freezes in the second half of the year, according to memos from top leaders. (CNBC)

3. Unemployment is likely already at Great Depression-era highs

The news about U.S. job losses has been grim, as around 26.5 million workers have filed for unemployment benefits in the past five weeks, but the number of Americans who have lost their jobs is likely far higher.

  • The true number of people currently unemployed in the U.S. is likely between 32 million and 70 million, putting the unemployment rate somewhere between 20% and 45%.

Driving the news: The latest U.S. initial jobless claims report showed more than 4.4 million laid-off workers applied for unemployment benefits last week, raising the total to about one in six American workers.

  • Continuing unemployment claims, or the total number of Americans receiving jobless benefits, rose by 4.1 million to an all-time high of 16 million for the week ended April 11.

By the numbers: Over the last decade, continuing claims have represented an average of about 27.5% of the number of unemployed, DRW Trading rates strategist Lou Brien tells Axios.

  • That would suggest there are more than 60 million people currently unemployed, putting the unemployment rate above 30%.
  • And that's a conservative estimate, given that continuing claims have increased by about 4 million people in each of the last three weeks.
  • The number of people unemployed today could very realistically be as high as 70 million.

Even if the continuing claims percentage jumps to 50% of unemployed, meaning nearly twice as many unemployed people as average qualify for and are receiving benefits, it would mean that upwards of 32 million people are now unemployed.

  • The rate has only risen to 50% once, in 1975, Brien notes.

Be smart: Both initial jobless claims and continuing claims are imperfect measures of the number of people who have lost their jobs as many are not eligible for unemployment benefits and some who are do not apply.

  • To remedy this, the U.S. government tracks unemployment through two separate means — employer filings and a regular survey of households.
  • But every measure misses large numbers of people, so the true unemployment rate at a given time is often not known until years later.
4. Professional investors keep loading up on cash

Data: Investment Company Institute; Chart: Andrew Witherspoon/Axios

Institutional investors revived their flight to safety last week, pushing inflows to money market funds to all-time-high levels, largely unaccompanied by retail investors.

What it means: Money market funds saw inflows of $108.70 billion for the week ending April 22, almost all of which came from professionals who added $108.26 billion.

  • For institutional investors, it was the fifth highest weekly total ever recorded.
  • Four of the five largest weekly inflows by institutional investors to money market funds have come since March 18, data from the Investment Company Institute show.
  • Retail investors have held firm, as not a single week in April has registered in the top 40 highest weekly inflows.

The big picture: A record $4.65 trillion is now held in money market funds. That's around $700 billion more than the peak level seen during the 2007–2009 global financial crisis.

  • Further, the share of that total held by professional money managers has increased to 67%.

Go deeper: Investment professionals are selling while mom and pop buy the coronavirus dip

5. Coronavirus rewrites tech's product plans

Illustration: Aïda Amer/Axios

Despite the tech industry's relative health during the pandemic, tech product roadmaps and schedules have been revisited, shaken up and in some cases completely rewritten thanks to the coronavirus, Axios' Ina Fried writes.

What's happening: Both giants and startups are trying to focus on projects that are doable, relevant and critical. Those that don't meet any of these criteria are likely to fall by the wayside.

The big picture: Although tech may be the best-positioned industry of all for an era of remote work, and companies in Seattle and the San Francisco Bay Area were among the first to send workers home, the industry is hardly immune to this crisis' impact.

It's still too early to know the full impact, but early casualties have already begun to surface.

This is surely just the start. In a recent interview with Axios, Box CEO Aaron Levie said he made the call several weeks ago that the coronavirus' impact would be much greater than initially assumed.

  • "This is probably going to alter our entire year in terms of product strategy," he said, adding that he expected the rest of his peers were reaching the same conclusion.

Go deeper: Coronavirus rewrites tech's product plans

Thanks for reading!

Quote: “The Greeks dedicate this thank-offering to Athena for their return home.”

Why it matters: On April 24, 1184 B.C., Greek soldiers entered Troy inside the famous horse they offered as a "gift" to the Trojans with the above inscription.

  • It was the end of the Trojan War, one of the most important events in Greek mythology, highlighted in several Greek works including Homer’s "The Iliad."