The bust is on! Not only is the stock market crashing like never seen before (Dow down 3,000 points today!), but there are now deeply distressing breaks in the bond market. These staggering responses to Fed actions run counter to what is expected; but people are so focused on stocks, the are missing the more worrisome action.
When the Dow crashed trough the sub-basement into the pit of hell today, 10-year bonds remained locked around the 0.75% rate they’ve hunkered in at for about a week. This represents a freeze on the flight to safety in bonds, which indicates how illiquid the bond market has become and how its patches are pulling at their stitches. Money fleeing stocks is now avoiding bonds and going to cash.
Last Monday 30-year yields posted the biggest intraday decline since at least October 1998, pushing bond prices up as stocks continued to sell off. That’s what you would expect when stocks are crashing and the Fed is rushing back to easing. Stocks sell and money flees into bonds as a safe haven, pushing yields down and prices up. The rest of the week they did the opposite. Bond yields rose and prices fell as stocks mostly fell.
By the the end of the week, a massive injection of cash from the Federal Reserve along with President Donald Trump’s declaration of a national emergency with promises of fiscal support gave stocks their best day in history, but bond prices continued to fall as yields rose. Throughout the Fed’s Great “Recovery,” bond yields fell whenever the Fed sucked up government bonds with its QE, but now concerns about the necessary issuance of even greater record amounts of government debt, pushed the yields that investors demand up and prices, therefore, down, even when the Fed practically promised to buy everything.
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