U.S. Treasury Yields and Interest Rate Swap Rates Remain Near Their Record Lows

May 15, 2020
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U.S. Treasury yields and interest rate swap rates remain near their record lows set last Friday (May 8) as most economic releases throughout the week revealed record weakness, helping to support the case for low interest rates.

In addition to weak economic releases over the week, lawmakers introduced a bill that would authorize the President to impose sanctions on China if the nation did not cooperate with the investigation into the COVID-19 outbreak. The move followed comments from the White House that the U.S. has no interest in reopening trade talks with China.

Meanwhile, during a Senate coronavirus hearing Tuesday, America’s top infectious disease official, Dr. Anthony Fauci, issued concerns about reopening parts of the country, stating that the U.S. could face more “suffering and death” if states start to reopen too quickly.

Record Drops Seen in Consumer Prices

Tuesday also saw a record drop in April’s core Consumer Price Index (CPI). The core CPI, which excludes volatile food and fuel costs, fell 0.4% in April after a 0.1% decrease in March, Labor Department figures showed. That is the biggest drop in this core data back to 1957.

The overall CPI declined 0.8% in April from a month earlier, the most since December 2008, as gasoline prices plunged 20.6%. Annual consumer inflation slowed to 0.3%, the smallest increase since 2015.

But the cost of food at home surged 2.6%, the most since 1974, as Americans stocked up at grocery stores. Prices for bread, chicken, carbonated drinks, and snacks all posted record increases, as did household paper products.

Wednesday, a measure of underlying U.S. producer prices fell more than expected in April as the economy reeled from restrictions imposed to contain the coronavirus.

The U.S. Producer Price Index (PPI) dropped 1.3% last month, more than the 0.5% decline expected by economists polled.

The PPI is more of a wholesale price index as compared to the CPI, which is more of a retail price index. The CPI includes imports and sales taxes while the PPI does not.

U.S. Retail Sales Register the Steepest Decline on Record

Revenues at retailers and restaurants fell 16.4% in April, almost double the 8.3% drop in March which was previously the worst result in this data back to 1992, according to the Commerce Department report. This result compared with the median projection for a 12% decline.

With most Americans stuck at home and unemployment the highest since the Great Depression era, people sharply reduced their spending. Further store closures and bankruptcies across the nation risk exacerbating the situation.

All but one of the 13 major categories decreased, led by a 78.8% drop at clothing stores and a 60.6% decline at electronics and appliance outlets. The only category to record a gain was nonstore sales — including online sellers such as Amazon.com — which increased 8.4%. Receipts at food and beverage stores, which saw sales surge in March as Americans stocked up on essential goods, fell 13.1% in April.

Unemployment Continues to Grow

Treasury yields fell on Thursday as the latest unemployment data showed the coronavirus pandemic continues to hammer the labor market.

New filings for unemployment claims totaled 2.981 million for the week ending May 9, according to Labor Department figures. Economists surveyed had been expecting the latest count of new claims to be 2.7 million.

The new claims for unemployment insurance filed last week brought the coronavirus crisis total to nearly 36.5 million, by far the biggest loss in U.S. history.

In further disruptive labor related news, the Fed published a survey showing that almost 40% of Americans in households making less than $40,000 a year had lost a job in March alone, not counting the job losses in April.

Federal Reserve Chairman Powell Speaks at The Peterson Institute

Fed Chair Powell, speaking at a virtual event hosted by the Peterson Institute for International Economics in Washington, said the U.S. economy faces unprecedented downside risks amid the coronavirus pandemic that could do lasting damage to households and businesses if fiscal and monetary policy makers don’t continue to rise to the challenge. He continued to say that this additional support may be needed to recover from the current crisis that has caused “a level of pain that is hard to capture in words” and that “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems”.

Powell once again reiterated his stance against negative interest rates. He pointed out that the effectiveness of negative rates is mixed, and that the policy is not currently under Fed consideration.

Several Federal Reserve Bank presidents joined in with this view, downplaying the role of negative interest rates as a possible move by the Federal Reserve.

This stance and set of views come despite the repeated call for negative rates by President Trump.

If the Fed has definitively eliminated negative rates from its playbook, it is worth considering the central bank’s alternatives in the not unlikely event that further easing is required. One obvious option is a faster expansion of its balance sheet.

As an example, in an unprecedented step this week, the Fed began buying exchange-traded funds invested in corporate debt to support liquidity in the market where large companies borrow.

The House of Representatives Introduces an Additional $3 Trillion Spending Package

House Democrats this week proposed a $3 trillion virus relief bill, combining aid to state and local governments with direct cash payments, expanded unemployment insurance and food stamp spending as well as a list of progressive priorities like funds for voting by mail and the troubled U.S. Postal Service. The bill is a follow-up to the $3 trillion Congress has already spent on four bills in response to the crisis caused by the coronavirus pandemic.

Although this bill was immediately dismissed by the Senate and the White House as being too much, too soon, it is interesting to look at the House bill to see where the minds of Congress are focusing in regard to further fiscal relief for the suffering economy. The House bill’s provisions include:

  • $1 trillion in aid for state and local governments, including tribal governments and territories
  • $1,200 in cash payments to individuals and $1,200 for dependent children – up to $6,000 per household
  • An extension of the $600 weekly increase to unemployment insurance into next January
  • $200 billion to fund what is described as “hazard pay” for essential workers who have had to risk exposure to the virus as they stay on the job while much of the rest of the country has been at home

The House bill would not add additional funding for the popular Paycheck Protection Program (PPP) for small businesses. But it would extend the PPP to December 31 from the current June 30 deadline for this loan to convert into a grant if job re-employment requirements are met.

Are Rentals the Next Housing Crisis?

The next housing crisis may be here, and this time, it’s rentals. Across the U.S., landlords and tenants are wrangling over next month’s rent while an approaching avalanche of evictions threatens to bury them both.

About half of the 43 million rental units in the country are owned by small businesses.

To avert a damaging wave of foreclosures like the one that swept the country more than a decade ago, Congress included a provision in the $2.2 trillion rescue package it approved in March that allows homeowners with government-backed mortgages to defer payments for up to a year. But Washington stopped short of offering renters comparable relief.

Many U.S. states have imposed moratoriums on evictions. But without a national rental-market bailout, the economic pain is likely to spread, flowing upwards to landlords, their lenders, and cities losing property tax revenues.

Lenders could see significant losses, particularly regional banks that often finance local property investors. There is roughly $1.6 trillion of outstanding mortgage debt on multi-family properties. Defaults reached 5% in the last recession, and some forecasts call for defaults to reach 10% during the current economic downturn.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

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