Because of time constraints we have to skip the overnight market comment. We do want to point out that Coronavirus worries are on the rise, and that has resulted in lows for US Treasury yields in the Asian session. Of course, the Fed’s fumbling last evening didn’t help matters either. Policy-wise, we think the Fed doesn’t really understand how its balance sheet affects markets. When asked about the money market turmoil last year, Chair Powell repeated that they couldn’t have seen it coming. That’s just wrong. Everyone who can do a regression would understand that the Fed shrinking its balance sheet and swings in autonomous liquidity draining factors could produce money market turmoil if excess reserves would fall below a certain threshold (and we correctly forecasted where the danger zone would be). And now the Fed just raised the IOER rate by 5bps – another ‘technical adjustment’ – even though reserves would have to increase by $300 to $400 billion before fed funds would fall out of the target range. There was no need to do the tweak know and thereby flatten the yield curve at a time when the curve had already flattened strongly on global growth worries.

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