Fed Rate Cut Boosts Bonds, Doesn’t Slow Stock Sell-Off

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Despite the U.S. Federal Reserve’s 3 March rate cut of 0.5 percent, which took the yield on 10-year Treasury notes to a historic lows, it failed to slow the stock markets’ slide.
As Fed chair Jerome Powell was announcing the cut and answering reporters’ questions last week, the Dow Jones Industrial Average fell another 603 points.
Market players aren’t convinced that the rate cut will buoy the markets, especially given Powell’s comment that no one can know how long the coronavirus epidemic, and its accompanying market panic, will last.
David Serra with Algebris, a London investment firm, called the rate cut a mistake that will strengthen investors’ belief that central banks can reliably prop up weak economies even when problems arise outside of finance.
In this case, “only the World Health Organization, the Centers for Disease Control and Prevention, and fiscal policy matter,” he said, “not central banks.”
To escape the market’s free-fall, investors flocked to U.S. Treasury notes, bidding prices up and driving yields into record low territory; as bond prices rise, interest rates fall in proportion.
From 25 February through 5 March, the yield on the 10-year Treasury note fell 37 percent, falling below 1 percent for the first time since 1871.
On Monday, 9 March, the yield shrank still more to 0.32 percent.
During the Great Depression, considered the worst financial crisis in U.S. history, the rate remained between 2 and 3 percent.
TREND FORECAST: Last year, before the coronavirus broke out, we had forecast zero-to-negative U.S. interest rates by October 2020.
The Fed will meet next Wednesday. While we forecast a 25 basis point cut, should equities continue to sharply fall, it will be a 50 basis point cut… which will be bullish for gold as investors seek safe-haven investment with potential for high dividends.

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