Mar 10, 2020 - Economy & Business

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.

  • "The market is starting to look towards other measures ... and is very gradually trying to price in a Japanization of the U.S. curve," Subadra Rajappa, rates strategist at Société Générale, tells Axios.

What it means: Japan's central bank has instituted the world's most aggressive monetary stimulus campaign, buying not just government bonds, but also corporate bonds and even ETFs in an effort to help stimulate growth and inflation in the country.

  • The stimulus has had limited effect and the country looks almost certain to fall into recession by the end of the first quarter.

Go deeper: Investors see stocks overvalued, recession looming

Go deeper

The coronavirus outbreak could finally sink the dollar

Data: FactSet; Chart: Axios Visuals

The dollar is buckling under the weight of expected rate cuts from the Fed and record-low U.S. Treasury yields.

The state of play: It has fallen to its weakest level when valued against a group of global currencies since the beginning of the year, and experts think there could be much further to go.

Goldman Sachs expects a full percentage point of rate cuts from the Fed

Fed Chairman Jerome Powell. Photo: Sarah Silbiger/Getty Images

Fed chair Jerome Powell's statement on Friday afternoon that the U.S. central bank was "closely monitoring developments" and would "act as appropriate to support the economy" has eliminated any doubt that the Fed will cut U.S. interest rates at its meeting on March 17–18.

What we're hearing: "A Fed cut in March appears nearly certain," analysts at Goldman Sachs said in a late Sunday note to clients.

Record low U.S. Treasury yields are expected to keep falling

Data: FactSet; Chart: Andrew Witherspoon/Axios

The yield on the U.S. 10-year Treasury note fell below 1% for the first time ever after the Fed's unexpected rate cut.

The state of play: This drop might not be the end. "We expect Treasury yields to remain low and perhaps fall even lower," Charles Schwab chief fixed income strategist Kathy Jones wrote.