Treasuries Yields Plunged, Hiting Historic Lows. VIX Soared To 32

Is it the Fed that has changed... or the world around it?this is not the first time that the Fed has responded more to the risks than the data themselves

BBVA Research | Covi-19 jolts equities and sovereign yields again as mounting coronavirus cases outside China dashed hopes that the outbreak had been contained. U.S. Treasury 10Yyield hit historic lows, dropping below 1.30%. Elsewhere, the WHO stated that the covid-19 has the potential to become a pandemic, while the U.S. warned not to travel to Spain to avoid potential dangers.

Central bank’s officials remained mute, without shedding any light about how to tackle the Covid-19. However, today’s Bank of Korea meeting did not cut interest rate and showed more signs that they would support companies affected by Covid-19. On the other hand, today’s speech by Christine Lagarde did not contain any surprises, bearing in mind current market conditions. Instead she assessed the climate change risk, suggesting the ECB will evaluate climate risk in collateral framework, while it is expecting the first banks’ climate stress test result by year-end.

However, markets increased their expectations of additional interest cuts. The market penciled a 25 pbs Fed interest rate cut in March (60% probability) and 100% probability of 50 pbs interest rate cut in April. In addition, markets have brought forward expectations for ECB interest cuts (90% probability of a 10 pbs interest cut in September and 100% in October).

There were some bright spots in the Eurozone’s economic data. Economic confidence unexpectedly increased in February (103.5 ; Cons : 102.8 ; Prev : 102.6, revised from 102.8 ), with improvements also in industry and services. In addition, the U. S. GDP showed weaker composition: U. S. GDP Annualized QoQ ( 2nd estimate) did not bring any surprises, achieving last quarter results and fulfilling market expectations ( 2.1% QoQ ; Cons: 2.1 % QoQ; Prev: 2.1% QoQ) underpinned by an upward revision from trade and inventories, while consumer spending was revised down. Preliminary durable goods orders fell 0.2% in January below consensus ( -1.4%; Prev: 2.9%), while core durable goods jumped to 1.1% from -0.5 %.

Sovereign yields extended sharp declines across the board. The 10Y UST yield declined, hitting fresh record lows, with the German yield also following the same path, hovering around – 0.55%.

In Europe, peripheral bond yields surged further as risk aversion dominated the market. Additionally, the high yield bond spread widened sharply (to 436 bps), hitting October’s levels.