This morning, the Federal Reserve cut its benchmark rate by a half percentage point in an effort to limit potential economic disruptions from the coronavirus. Markets became quite volatile immediately following the announcement. Initially, stocks went up, moved down and then up again.
The yield curve shifted substantially lower, but the most noted change was the steepening of the yield curve. Short maturities rallied in price more than longer maturities. T-bills and the 2-year US Treasury note still anticipate further easing in the near future.
Market participants are showing mixed feelings and have many questions:
- Why did they not wait until the upcoming FOMC meeting, to show less of an emergency?
- What does 50 basis points matter to a global health issue?
- Is the Fed now catering to the markets and/or the politics of an election year?
Fed Chairman Powell’s press conference did not do much to help answer the questions from market participants. Powell repeated that the Fed is “closely monitoring” developments in the market, and added that the Fed believes that, after today’s move, the current stance is appropriate.
The bottom line seems to be, despite Powell’s comments on a continued strong economy, the Fed recognizes that the possibility of a recession has increased due to the global spread of the coronavirus globally and here in the US.
The Piton team believes the risks have changed materially.
We think economists will look at the prospects and potential of a US “technical recession” as very real.
We would not expect this to affect the US dollar dramatically because this seems somewhat coordinated with the G-7 central banks.
We do not see this move as a long-term positive for risk markets.
Lower rates will also bring out “yield seekers” in dividend stocks, preferred bonds, and high yield. This will come with higher risk but will be positive carry to cash investments as Treasury yields breech 1% in short and intermediate sectors.
Despite low yields, conservative fixed income and cash management may prove to be a helpful asset allocation for the foreseeable future. Please reach out to Piton's Head of Fixed Income, Brian Lockwood, CFA at 646-518-2800 to discuss the ongoing developments in the markets and to review your current fixed income portfolio.