We just saw the greatest assist in history to the credit markets that are related to bonds. The Fed literally stopped the bleeding in the municipal bond components, corporate bond components and bond-based ETF components because they started purchasing them – which points to the Japanification of our credit markets. Companies like Schwab and Vanguard just got a huge assist. We now see great buys in the bond market, now that the Fed has plugged the hole. This is really unprecedented. 

Liquidity dried up in the stock market really fast. That’s why within a month’s period of time the Dow dropped by 38%. Now of course it’s rebounded a bit, but it’s probably not over. That’s a liquidity loss of huge proportions within one month. Well, we saw it in the bond market too. The bond market is much bigger than the stock market but even in the bond market, there weren’t a lot of buyers. It wouldn’t surprise me if they start propping up the bond market because we know that’s the safer part of the market compared to the stock market.

There’s good buys for everything today for both common stock and good buys for fixed income. The thing that makes fixed income a little different, as you know, is that if you think the stock market’s a good buy or if certain portions of stock market are a good buy because they’re down X percent, there’s no guarantee it’s not going to end up down two X, and it could take a lot longer to get back. In the fixed income markets, because there’s a par value, an amount that ultimately needs to get paid back to investors provided there’s no default, typically you feel like that’s a safety net. At the end of the day, in 2008, that’s why all those stocks and bonds all dropped in value, but the bonds came back a lot quicker: because of that safety net. The stock market took a lot longer to come back.

I don’t know if anybody’s paying attention, but the 30-day Treasury is at -0.11 right now. The 90-day Treasury is at -0.04 right now. The curve, naturally, is starting to revert negative with all of the stimulus that we have going on. If the Fed goes negative, what are the benefits other than forcing people to put their cash in play? Invest it or put it in a business; that’s really another form of artificial stimulus or artificial manipulation and it really is the end of economic expansion when you create negative rates. Europe and Japan are the perfect models to look at for that.

What The Current Market Turmoil Could Mean For Your Investments

In the midst of all the stock market volatility triggered by the coronavirus, the bond market has also felt historic impacts. In a classic flight to quality, fearful investors fleeing the stock market flooded the bond market, at least the government bond market, causing treasury yields across the yield curve to drop to their lowest levels ever. At one point, rates on all U.S. Treasuries ranging from two years to 30 years fell below 1% for the first time ever in our history. In fact, that’s the main reason the Fed was forced to lower short term rates to zero: to un-invert the yield curve. An inverted yield curve is not only a classic warning sign of recession but can also be a cause of recession. When long term rates as determined by the 10-year Treasury fall below short-term rates, banks and other lending institutions have no financial incentive to approve loans.