2, 3 and 5-Year Treasury Yields All Drop Below The Fed Funds Rate
Things are getting increasingly more crazy in bond land, where moments ago the 2Y Treasury dipped below 2.40%, trading at 2.3947% to be exact, and joining its 3Y and 5Y peers, which were already trading with a sub-2.4% handle. Why is that notable? Because 2.40% is where the Effective Fed Funds rate is, by definition the safest of safe yields in the market, that backstopped by the Fed itself. In other words, for the first time since 2008, the 2Y (and 3Y and 5Y) are all trading below the effective Fed Funds rate.
That the curve is now inverted from the Fed Funds rate all the way to the 5Y Treasury position suggests that whatever is coming, will be very ugly as increasingly more traders bet that one or more central banks may have no choice but to backstop risk assets and they will do it – how else – by buying bonds, sending yields to levels last seen during QE… i.e., much, much lower.