Liquidity market meets the challenge
Deborah Cunningham, CFA
Executive Vice President, Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager
In what will be a month we would all like to forget, I hope we will look back on March and recognize the robustness of the liquidity market during the coronavirus crisis. I mean this in the broadest sense. In times of financial strain, the Federal Reserve should be a partner of the markets, especially the money markets. It has been just that, from the rate cut of 50 basis points on March 3 to the initiation of new programs to boost cash flow across markets and main streets. Chair Powell has pulled out many tools from the policy toolbox, and that support has been effective even through times of tremendous concern and stress. Liquidity is abundant and transactions generally are occurring smoothly.
After historic inflows and unprecedented buying of Treasuries that pushed some of the shortest bills into negative yields—not negative rates, which we still do not anticipate—the Treasury yield curve appears to be returning to an upward slope. We think demand for U.S. government debt will subside as the Fed reduces its purchases from $75 billion to $60 billion on Thursday and because the fiscal stimulus package approved by Congress will require the government to raise a great deal of cash in a short period of time. The logical place to do so is through issuing Treasury bills. Also, if the markets stabilize as uncertainty around the coronavirus abates, the extreme demand for Treasuries may subside. All of these should help to push yields on short-term Treasuries back into positive territory.
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