Rate Markets Say No V Recovery

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Rate Markets Say No V Recovery

Three points today:

#1: Former Fed president Narayana Kocherlakota made some waves on Friday when he proposed that the US central bank should take interest rates below zero; Fed Funds Futures (FFF) markets show no signs the market is taking that idea seriously:

  • Futures markets currently discount essentially 100% odds that the Fed maintains its 0 – 25 bp policy rate until at least November 2021.
  • While 2022 FFF are not as actively traded, last prices from Friday show you have to go out to midyear before the odds of a Fed rate increase go over 50%.
  • Short-term Treasury prices show the same “not going to happen” perspective on negative rates. Three-month Treasuries yield 12 basis points right now. German 1-year paper, by contrast, yields negative 54 bp, showing that markets do discount negative rates when warranted.

Takeaway: negative rates are not happening in the US, but the fact that Fed Funds Futures expect short rates to remain near zero for 2 years says a lot about what this market thinks is the most likely pace of economic growth.

#2: Tightening corporate bond spreads will be top-of-mind for Chair Powell as he prepares his press conference remarks and takes questions; here is the current state of play for this market:

First up, investment grade US corporate debt over Treasuries for the last year:

Next, here is just the BBB part of investment grade over the last year:

And finally, here are high yield corporate spreads over the last year:

Three points on these charts:

  • Despite the Fed’s March/April announcements that it would support both the investment grade and high yield corporate debt markets, spreads remain much higher than pre-COVID Crisis levels.

    Investment grade spreads February 3: 108 basis points
    Now: 236 bp

    BBB Spreads February 3: 139 bp
    Now: 311 bp

    High yield spreads February 3: 139 bp
    Now: 311 bp
  • The Fed’s announcements have, however, allowed for record corporate debt issuance over the last month. Paper may be pricing much wider than it would have in January, but at least large US companies have access to needed capital.
  • Corporate bond spreads have basically stalled over the last week in the same way as US equities have tread water.

Takeaway: corporate debt markets are waiting for more color from the Federal Reserve in terms of how they envision the mechanics of their involvement and how that might impact spreads. This will be a critical issue for Chair Powell to address on Wednesday.

#3: An update on our New York – Orlando flight summer vacation indicator:

  • On April 7th, the single-seat cost of a Delta non-stop round-trip flight from New York to Orlando was $93 any week from June 3rd to August 2nd except for July 4th weekend ($105).
  • Worth noting: Disney is still allowing online reservations to its Orlando-based hotels for dates after June 1st. That may not mean anything or it may be an aspirational date. But those dates are available and open to buy right now.
  • Delta’s pricing algorithms must be sniffing out incremental demand, because less than 3 weeks after our first look airfares are going up. The front half of June is still cheap at $95/seat, but July 4th weekend is now $167/seat and the 4 weeks after are running $142 – $167/seat.

Takeaway: never underestimate the American consumer’s desire to spend regardless of what may be happening around them.


Fed Funds Futures: https://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund.html

Kocherlakota Bloomberg piece: https://www.bloomberg.com/opinion/articles/2020-04-24/coronavirus-economy-the-fed-should-go-negative-next-week