(Bloomberg) — U.S. Treasury yields beat a retreat from session highs Thursday after the Federal Reserve brandished its most aggressive market support measures since it was digging the economy out of the last recession. It didn’t last.
Yields across the curve climbed to their highest levels of the U.S. session in late trading. At the time of the surprise announcement at about 12:45 p.m. in New York, the two-year note’s yield fell more than 10 basis points to 0.38%. By 3 p.m., it had backed up to 0.50%, suggesting there’s doubt the measures will work. The dollar, which had climbed nearly 2% against a basket of major currencies, halved its gain. The S&P 500 Index remains down more than 8% on the day.
“It prevents the market from going into 2008 mode, but the issue is that the cash flow of business and households is going to take a hit,” said Steven Englander, head of G-10 currency and rates strategy at Standard Chartered (LON:STAN). “If the economy is to recover when disease conditions improve they have to keep going concerns afloat — very different than even 2008.”
Yields further out the curve also declined after the Fed’s action, richening the price of the 30-year Treasury bond auction that closed at 1 p.m.
The Fed, which has been buying Treasury bills at a pace of $60 billion a month since October to account for a shortage of bank reserves, said that beginning Friday it would conduct those purchases across the full range of Treasury securities to address “highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.” The decision amounted to a conversion of the reserve management purchases “into an outright QE,” Jefferies economic Ward McCarthy said in a note.
The central bank struck as markets were showing new signs of stress. The climb in yields suggested traders were offloading their most liquid assets to meet other obligations as conditions in risk markets worsened.
The transmission mechanism for QE is the “portfolio balance channel” which is when investors buy risky assets,” said Subadra Rajappa, rates strategist at Societe Generale (PA:SOGN) SA. “We are not seeing that reflected in the equity markets, at least not as of yet.”