Should You Buy Bonds? Fed’s New Plan Could Cause “Treasury Boom”

Federal Reserve Chairman Jerome Powell

Stocks are down.


New York coronavirus cases surged overnight to a total of 20,875. That’s an increase of 38%.

Worse yet, Congress can’t agree on a coronavirus stimulus package. Valued at $2 trillion, some analysts don’t think it’ll be enough to prevent a recession.

Others maintain that a massive buying opportunity (and economic recovery) is almost here.

The market just endured its worst trading week since 2008, after all. Equities appear historically oversold.

The authorization of a federal relief fund – something that could happen as early as this afternoon – might be all it takes to spur on a massive rally.

But Washington has yet to get its ducks in a row. The Fed’s taken matters into its own hands in the meantime.

As of this morning, the central bank is offering “blank checks” via unlimited asset purchases to aid the flailing markets.

Treasury yields sunk immediately following the Fed’s announcement.

It was something that had analysts concerned last week; a rush to cash driven by liquidity fears. Bond prices collapsed, eventually bottoming last Wednesday. The 10-year Treasury note yield rose to a monthly high of 1.299% despite the Fed’s best efforts to keep interest rates low.

If the Fed couldn’t stop rates from rising on their own, an economic recovery would be extremely difficult.

Thankfully, though, bond prices are rising (and yields are falling) following the Fed’s new purchasing plan.

“Today’s announcement will go a long way to reassuring investors the Fed has their backs and will stop the growing credit crisis in its tracks,” Chris Rupkey, MUFG’s chief financial economist, said this morning.

“Yield spreads should narrow and the stock market should rest easier now that the Federal Reserve is giving it all it’s got.”

It’s potentially great news for short-term traders, and not only because the additional liquidity will stabilize the market. In addition, a trading opportunity may have emerged in Treasury ETFs.

In the daily candlestick chart above (in which each bar represents one trading day), the iShares Trust U.S. Treasury Bond Fund ETF (NYSE: GOVT) – an ETF that tracks Treasuries ranging from 1-30 year maturities – has broken out past its minor bearish trend (represented by the yellow trendline).

In other words, Treasury prices are likely headed north. A Treasury breakout will be confirmed if today’s gains stick, meaning that yields should continue falling. That would ultimately be good for an ailing economy provided that inflation is kept in check.

But most of all, it’s a huge opportunity for traders looking to “get long” (buy) a rising asset. If GOVT opens higher tomorrow morning, it could soar even further.

Potentially past its March 9th high and even if the market ends up rallying in the coming weeks.

Rates are low. The Fed’s using every tool in its fiscal bag to keep them that way.

That’s a welcome gift to trend-seeking investors trying to make a few extra bucks during the “COVID-19 crunch.”

Especially as the number of confirmed cases continues to increase in the United States, diverting funds to Treasuries, one of the safest investments around.


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