Fed’s $1.5T attempts to clear treasury bond stalemate

The Dow Jones index fell 2,350 points or 10% Thursday despite the Federal Reserve announcing a $1.5 trillion in loans “to prevent ominous trading conditions” as a result of Covid-19.

The phrase “to prevent ominous trading conditions” is what caught my attention. So without getting into the interior plumbing of the Treasury securities market, the most liquid market in the world, there were problems between the bid and ask in that market.

The yields on the 10-year government paper fell to all-time lows this week just as Wall Street banks were selling. This created a bottleneck as banks were asking for higher prices for the paper and buyers were not lining up.

Some financial firms were squeezed for short-term lending because of the constriction in treasuries, so they sold what they could to cover their margin calls, namely equities.

The Fed is also beginning Friday with quantitative easing by buying $60 billion a day in treasury securities similar to its operations in response to the Great Recession in 2009.

Equity futures on Friday morning appear to be responding somewhat to the Fed’s actions as Dow futures rose 800 points or 3.7% at 6 AM.