Futures Market Freaks Out Over Coronavirus

Coronavirus positive test on blood collection tubes on US flag.
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Futures traders mounted a rebellion against the Federal Reserve’s monetary policy on Thursday.

The implied odds of a rate cut at the Fed’s March meeting on February 17 and 19 jumped to 72 percent on Thursday, up from 33 percent a day earlier and just 8.9 percent a week ago, according to the CME Group’s FedWatch tool.

This indicates that traders in fed fund futures think that the Fed will change its policy of holding rates steady in the near future. The current Fed target is 1.50 to 1.75 percent for the benchmark overnight interbank lending rate.

Treasury yields from three-month bonds to 10-year bonds are below the Fed Funds target rate, a structural inversion that could crimp bank lending and slow the economy. The 10-year Treasury yield is below the three-month yield, an inversion that many economists think can be a harbinger of recessions. The two-year to 10-year spread, another closely watched indicator, remains positive.

The global spread of the coronavirus has been driving down long-term bond yields as investors look for safe-haven investments and expect that monetary policy will have to become more accommodative to offset any economic drag from supply-chain disruptions, slowing commerce, and declining demand.

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