Recession Underway, but 10 Year Yield Rises

April 9, 2020
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Last week, economic data coming in from the coronavirus’ impact came in worse than expected, leading to the ten-year Treasury falling to 0.62%, its lowest level since the Fed’s emergency target rate cut in the beginning of March. The two-year Treasury had held constant at around 0.23%. However, this week, the ten-year yield has creeped higher, as high as 0.78% intraday on Tuesday, with the two-year Treasury yield still hovering around 0.24%. While not a robust steepening of the yield curve (roughly +15 bps), it is a positive sign from the fixed-income markets, a departure from last week’s more negative views.

Nevertheless, the depressing near-term economic news makes it difficult to see a way through to the other side. The latest reading of the Bloomberg Economics U.S. recession-probability model says the economy has 100% chance of being in recession. The March reading illustrates the hard-stop in economic activity. The extraordinary deterioration in the labor market, with 10 million jobless claims filed over the last two weeks in March, and this week’s claims of over 6.6 million, is the main driver of the 100% reading. Bloomberg projects the economy to contract 9.0% in the second quarter with potential for an even larger pullback of 14% possible.

Such a clear signal was not evident before even the start of the Great Recession. This COVID-19 recession is unique in the speed and depth of the contraction.

While economic data continue to lag, the sharp pullback in financial markets and extraordinary deterioration in the labor market provide a clear read on the sudden stop.

This downturn’s duration will be determined in large part by the length of the social-distancing shutdown and its effect on employment and income. Any further substantial declines or increases in economic activity will be visible in every indicator that defines a recession, such as: real GDP, real incomes, employment, industrial production, and wholesale-retail sales.

The sharp pullback in activity will also weigh on corporate profit margins. A considerable drop in earnings will have consequences for productivity and the potential for recovery once the outbreak is “over.”

Prior to the current health crisis, the economy was in good shape and the financial sector was sound. Most believe if the government can maintain liquidity in the markets along with support people’s incomes during this crisis, for however long it lasts, that the U.S. can get back to a normally functioning economy in much shorter order than after either the Great Depression or the Great Recession.

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