U.S. Rates: Lower Bound?

Mid Week Bond Update

U.S. Rates: Lower Bound?

The Fed's rate cut rippled through markets, but the longer-term effects are as yet unknown.

The off-schedule 50 basis point rate cut by the Fed at 10:00 AM on March 3 was the first major step taken by a G-7 central bank to soften the impact of the spreading COVID-19 coronavirus. Fed Chair Powell stated that G-7 leaders are coordinating their efforts in the face of this challenge; the Fed’s move is likely to be first among many within the G-7.

In the words of Western Asset’s John Bellows, “The speed and decisiveness of [the] Fed action reflect both the economic seriousness of the ongoing coronavirus/COVID-19 situation, as well as the Fed’s proactive stance when it comes to supporting the US economy”. And Brandywine Global noted that while monetary policy indeed has limits, it “can have a powerful impact on risk sentiment and boost risk asset valuations – at least in the short term.”

That was certainly true the day of the decision. Ten-year Treasury yields plummeted to a world-record low of 0.9043% before recovering slightly; the 30-year spiked briefly to 1.7518% but then notched downward, reaching as low as 1.5041% before reversing. Shorter-term rates also moved downward in reaction to the move, preserving the upward slope of the yield curve from 2 years to longer, and maintaining its slight upward tilt between 3-month and 10-year maturities.

U.S. 10-Year Treasury Yield, Jan 1, 2019 – Mar 3, 2020

Chart inspired by Western Asset. Source: Bloomberg, as of March 3, 2020. Yield shown are high, low and closing for each trading day included in the chart. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Market dislocations on this scale can be useful for value-driven managers. Along those lines, Western Asset recently commented that credit spreads can widen more than warranted by fundamentals, offering opportunities that might not be available in more settled times.

On the rise: Turkish Lira

Turkey’s February inflation reading came in at 12.37%, up from January’s 12.15%. The reaction in the relatively illiquid market for Turkish lira was to drive the currency upward, reaching as high as 6.0319 vs. the U.S. dollar before falling back to the 6.1 lira range.  The relatively positive reaction was due to the inflation figure coming in below the consensus of 12.7%.  Core inflation came in at a 9.97% annualized rate, also better than the expected 10.4%.

The news was a welcome bit of sunshine for the country, whose military activity on its border with Syria continues to create tensions, given the nose-to-nose proximity with Russian forces, Kurdish separatists, and Syria itself.

On the slide:  The dollar, finally

After peaking on February 21, the broad dollar index broke through 97 on the downside, a fall of a significant 0.71% on the news of the Fed’s surprise rate March 3 50 basis point rate cut. That brought the index down by more than 2.9% since the February 21 high.

The rising dollar has been a source of frustration for U.S. companies, whose export businesses can become relatively uncompetitive vs. foreign suppliers as a result.  A rising dollar can also work against the stated earnings of companies with operations and profits from outside the U.S., and has been a concern in advance of the upcoming quarterly earnings season which starts in the beginning of April.

Some analysts expect that lower rates in the U.S. will continue to put the dollar under pressure due to the decrease in income from the carry trade vs. other majors, including the Japanese yen and the euro.  That is, until other G-7 central banks follow the lead of the Fed in adding support to the world’s economies.


All data Source: Bloomberg, as of Mar 3, 2020, 5:00 PM ET, unless noted otherwise.

Note: The year for all dates is 2020 unless otherwise indicated


COVID-19 is the World Health Organization's official designation of the current coronavirus.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

A spread is the difference in yield between two different types of fixed income securities with similar maturities.

G7 refers to Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

The Turkish lira is the national currency of the Republic of Turkey.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

The DXY Broad Dollar Index measures the value of the U.S. dollar relative to the exchange rates of six major world currencies (the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc) which represent a majority of its most significant trading partners.



Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.