And Then There Were None Higher Than the Fed Funds Rate

With almost $17 trillion of global debt carrying negative yields, the bond market can’t get any crazier, can it? It can — and it did on Wednesday.

It’s not just that yields on global sovereign bonds continued their relentless march lower, with those on 30-year bonds issued by Italy falling to a record 2.01% from as high as 2.35% on Tuesday — a remarkable feat for a country with perpetual political risk. But even more shocking, those yields are well below the high end of the U.S. Federal Reserve’s 2% to 2.25% target for the overnight federal funds rate. In other words, the Fed now controls the highest interest rate anywhere in the developed world, according to Bianco Research, an unprecedented development in global markets. This raises the question of whether bond traders have gone crazy or whether the world’s most important central bank has fallen hopelessly behind the curve. Whatever the answer, it’s not likely to end well. A sudden reversal higher in yields has the potential to ripple through markets and economies in a highly negative way. But if the dire outlook for the economy suggested by bonds yields proves true, the Fed may feel pressured to cut interest rates more aggressively than it has forecast. But that gives off the impression that policy makers are panicking, which is something that no central bank wants because it could damage investor confidence and spark further turmoil in markets.