10 YEAR YIELD BELOW FED FUNDS – A POSSIBLE DANGEROUS HISTORICAL PRECEDENT
Of course, there are a lot of moving parts, but the 10 Year Yield at 0.7686% and the effective Fed Funds at 1.09% forces us to examine past instances of this inversion. The 10 Year yield fell below Fed Funds in Mid-2019 and caused only a brief disruption in the stock rally. The recent inversion associated with the horrible Covid-19 outbreak is coincident with a worse stock sell off (chart 1). Chart 2 looks at the 10 Year Yield versus the Fed Funds back to the early 1990’s. The past inversions in early 2000 and in 2006 occurred before the large downdrafts of the TECH bubble implosion and 9/11 and the Financial Crisis of 2008. As we started with, it is tough to nail down cause and effect, we can only look at what happened to search for patterns. The obvious problem from here, is that the FOMC had room to lower rates in 2000 and 2006, but with the effective Fed Funds at 1.09%, there is little room for accommodation at this point.