Traders Keep Bets on Negative Fed Rate in 2021: Liquidity Watch
Traders Maintain Negative-Rate Bets as Powell Vows to Use Tools
(Bloomberg) -- Traders held onto bets that the Federal Reserve will drop rates below zero next year after Fed Chairman Jerome Powell said the policy isn’t something officials are looking at, though he stopped short of ruling it out as an option.
Implied rates on fed funds futures contracts show the central bank’s policy benchmark dropping below zero by the second quarter of 2021, little changed from before Powell’s comments. Many strategists have attributed the pricing, which has emerged since last week, to bank hedging, rather than a bold wager the U.S. central bank will take its key policy rate negative.
Powell, speaking in a webinar the day after a record monthly drop in core consumer prices, said the economy faces unprecedented downside risks that could do lasting damage to households and businesses if fiscal and monetary policy don’t rise to the challenge. He said the bank feels the tools it has work, and added that the evidence on the effectiveness of negatives rates is mixed.
“Some investors still think the Fed didn’t rule it out completely,” said Gennadiy Goldberg, a strategist at TD Securities. “Since the initial move was technically driven, there may still be some need to hedge against negative interest rates.”
Several Fed presidents this week also downplayed the role of negative rates in the bank’s toolkit. The Fed has already rolled out a series of measures, from cutting rates to virtually zero to buying Treasuries and other assets in an effort to calm markets and ensure liquidity and credit continue to flow.
Powell also said Wednesday that over a longer period, more fiscal help may be needed, even if it is costly.
The Treasury said it expects to issue about $3 trillion of net marketable debt this quarter as borrowing needs explode in the wake of government stimulus to help combat the economic effects of the pandemic. It has sold roughly $1.6 trillion of Treasury bills since the beginning of April, which is starting to weigh on other parts of the funding market.
The gap between yields on three-month Treasury bills and overnight indexed swaps -- which measures the health of a key part of the U.S. government-debt market -- has risen to 7 basis points, from minus 22 basis points in March.
The spread risks widening further, in a sign that the market is struggling to absorb the deluge of bill supply, as inflows into government money-market funds slow and demand for the Fed’s facility for overnight reverse repurchase agreements ebbs.
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