33 million Americans have been filing for unemployment benefits since the middle of March. 2 year note yields fell by 0.13%, only 13 basis points above 0. From a pricing perspective, 13 basis points can swiftly be achieved to push the Fed Fund rates into negative rates.
On the left-hand side of the chart above you can clearly see how the expectations of Fed Funds for 2021 have downgraded significantly from 1.2-1.4 in Jan 2020 down to now just below negative rates.
Despite Fed chairman Powell and other FED chairmen insisting multiple times that negative rates is not efficient and they are in no hurry to follow the Bank of Japan and the European Bank money.
Bloomberg economics reveals how jobless claims is the best indicator of where the economy is heading, and right now those figures are signalling the worst contraction in GDP from the post-war era. As a result, there is a high level of concern with respect to what the market is telling us, even if US stocks continue to rally.
CME data shows April 2021 FED FUND FUTURES has now begun pricing in negative rates. A value above 100 represents negative rates. This pricing in has caught market participants off guard, it is unusual for negative rates to be expected this soon after the FED has rolled out a plethora of stimuli, from zero rates to flooding the economy with liquidity and the activation of significant asset purchasing programmes.
So, what’s driving yields lower into negative rates? Analysts cite that the possible reasons are due to falling London interbank offered rates, influxes of cash into money markets ($4.77 Trillion), growing deflationary fears and stop out of short positions.
It doesn’t seem likely that negative rates will actually be enforced at this point.