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U.S. treasury holds first 20-yr bond auction since 1986

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The U.S. Treasury is gearing up to auction a $3 trillion in debt to finance the growing federal budget deficit. Charles Schwab Chief Fixed Income Strategist Kathy Jones joins Yahoo Finance’s Seana Smith to discuss.

Video Transcript

SEANA SMITH: Welcome back to "The Ticker" here on Yahoo Finance. I'm Seana Smith. The Treasury Department planning to borrow about $3 trillion in the second quarter, as it does what it can to limit the economic impact from the coronavirus pandemic. Now to help finance its multi-trillion dollar deficits this year, the Treasury Department selling 20-year bonds today. It's the first time that this has happened since 1986.

So for more on this, we have Kathy Jones, chief fixed income strategist at Charles Schwab. And Kathy, thanks so much for taking the time to join this show today. Let's head to the Treasury's plans here, the prospect of increasing supply on the horizon. My question to you is, what does this mean for yields? And just, can yields stay low in this type of environment?

KATHY JONES: Well, I think they can, as long as the economy is soft and inflation is low, which we think is going to continue for quite some time. You know, the capacity to absorb this is pretty good, given that rates all over the world are very low. So despite the fact that ours are below-- say, 10-year yields are below 1%, that actually is pretty good compared to most of the rest of the developed world.

And the second thing is that I think with the Fed anchoring short-term interest rates near zero, that's going to put a lid on longer term rates going forward.

SEANA SMITH: And Kathy, I just want to ask you just the other big question here is just about potential inflation, especially with the balance sheet size. We had Fed chair Jerome Powell, though, yesterday reiterating the fact that the balance sheet size isn't raising any inflation concerns. I'm just curious what your thoughts are about that.

KATHY JONES: Yeah, we're not seeing any inflation concerns on the horizon anywhere soon. I mean, first of all, we have to get through the deflation that we're experiencing right now before we worry about inflation. And a lot of people look at the Fed's balance sheet and try to equate that to inflation down the road. That didn't work in the 2008, 2009 time period.

In fact, money supply growth, if that's what people are looking at, has really only worked as an indicator of inflation in the late '70s and early '80s. And since then, there's been virtually no correlation at all. So a concern-- there's certainly concern about that sustainability and about whether or not we're, you know, able to eventually started to outgrow the debt, or at least catch up in growth to the debt. But I think those are all-- inflation's a concern for well down the road.

SEANA SMITH: And Kathy, going off of that, just this massive injection of liquidity from both the fed and also from a fiscal point of view from Congress, how effective you think these measures have been just in order to try to stem the economic fallout from the coronavirus pandemic?

KATHY JONES: Well, I think there's been a lot of success in the market. So if you look at where credit spreads were, the difference between yields and corporate bonds and treasury bonds, they have come in quite substantially. They're still above the long term average, but definitely have declined quite a bit. And that was before the Fed even bought a single bond or bought a single ETF.

So the signaling allowed was pretty significant. Similar story, commercial paper market that they tried to help out, the money market. All of that injection of liquidity or discussion of injection of liquidity had a big impact on the market. And over time, having the rates normalize or rates come down, that allows financing for households and businesses to continue at a reasonable rate. So I think so far, so good on those plans.

SEANA SMITH: And Kathy, I want to ask you about this because you mentioned it in one of your recent notes, and we've been talking about it here on the show, and just this disconnect that we've been seeing the market performance and also what we've been getting on the data front. From your perspective, why do you think the gap between the market and economic performance is so wide at this point?

KATHY JONES: Well, I think two things. There's always a bit of the market tries to discount the future. But we also have-- we also have an analogy here that most investors are very aware of. And that is after the Fed stepped in, in 2009, risk assets did very, very well for a decade. I mean, it was a pretty smooth ride if you hopped on board and you made a lot of money.

And I think what happened this time around is the Fed stepped in very early and very aggressively. And investors said, oh, I know how this plays out. You know, I'm going to ride this wave, just as I should have done perhaps in 2008, 2009. So I think that it sort of reinforces the impression I got when it first happened, this whole thing first happened.

And as the markets began to sell off, the calls I was getting from investors weren't about what should I sell. It was what should I buy. And so I think there is a heightened risk appetite when people think the Fed has their back.

SEANA SMITH: All right, Kathy Jones, chief fixed income strategist at Charles Schwab. Always great to have you on the show. Thanks so much for taking the time.