NIRP Arrives: Treasuries Trade With Negative Yield

With the Fed's cutting rates three days ahead of the regular Wednesday FOMC announcement by 100bps to 0%-25bps, while also announcing a fresh $700BN QE as well as enhanced FX swaps, panic is in the air as reflected in the S&P futures which have been locked limit down since the open, and with equity traders frozen out and unable to do anything all the attention has shifted to rates where all hell is breaking loose.

As BMO's Ian Lyngen wrote in his Fed post-mortem "it is not inconceivable that we see negative Treasury yields in the front end when Asia comes back on line", and that's precisely what has happened, when yields on several Treasury bonds expiring in the next three months are getting quoted at slightly negative levels during Asia hours following the Fed’s 100bps rate cut.

One such example is the US govt bond maturing April 23, or in five weeks, which briefly dipped below zero, touching -0.01% after trading at 1.50% just two weeks ago.

And while so far NIRP is confined to short-dated maturities, expect to see negative rates migrating further right on the yield curve with every passing day, and as IG Markets' analyst Kyle Rodda notes "everywhere effectively could see their yields under pressure and turn negative - you’ve got the Fed coming in cutting rates to near zero, and the Reserve Bank of New Zealand slashing to ensure liquidity in markets."

As Rodda correctly notes, “it’s all about keeping financial conditions and liquidity as supported as they can, and investors might take this as another reason to just pile into safety."

"It’s a sign the Fed and other central banks are doing whatever it takes to keep liquidity ticking, especially when we saw Treasuries trading almost like equities last week when all people wanted to do was hoard cash."

Then there is the question of the Fed's ad hoc QE announcement which, as Powell's press conference made clear, is being made up as we go along, with the Fed simply stating that "to support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities."

Purchases will begin Monday on the below schedule, similar to Friday's QE shocker:

  • 10:15 – 10:30 am: Treasury Coupons 0 to 2.25 year sector, for around $10 billion
  • 11:00 - 11:15 am: Treasury Coupons 2.25 to 4.5 year sector, for around $8 billion
  • 11:45 am – 12:00 pm: Treasury Coupons 4.5 to 7 year sector, for around $9 billion
  • 12:30 – 12:45 pm: Treasury Coupons 7 to 20 year sector, for around $5 billion
  • 1:15 – 1:30 pm: Treasury Coupons 20 to 30 year sector, for around $5 billion
  • 2:00 – 2:15 pm: TIPS 7.5 to 30 year sector, for around $3 billion

It is this likelihood that the Fed will monetize anything and everything at far higher prices than market, coupled with a non-trivial probability that the Fed's next move will, in fact, be to cut below zero, that will keep yields depressed, pushing them ever lower, especially if equities are locked out, until most of the curve eventually drops below zero.