Category Interest Rates / Bonds

Yield Curve: Recession Dead Ahead

2-year bond yields are cratering. Rarely - if ever - have we seen them fall 150 basis points in just three weeks. This signals the bond market sees aggressively rate cuts from the Fed this year. But what would cause this? A recession? Some kind of credit crisis? I can tell you it won't be because inflation is back to the Fed's target of 2%. What's more, the yield curve has steepened sharply. This isn't good... and if history is any guide... a recession is likely within 12 months.

Market vs The Fed

There is strongly divided opinion on whether the Fed's decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that's not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming... one of them has it wrong.

The Fed Must ‘Choose their Poison’

The collapse of SVB and tightening financial conditions has put the Fed in a very difficult spot. For example, prior to the collapse they had a green light to raise at least 25 bps. Not now. Tightening rates could cause further pressure in the banking sector. However, if they choose not to - what signal does that send. There are no easy choices...

Powell’s Punch

In what was supposed to be a 'vanilla' testimony to Congress - Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address - he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity - it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate - with some now thinking 6.00%. What's more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.

10-Year Yields Continue to Rise… Why this Matters

The bond market has connected the dots - rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge... with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations... none of it great. Look for the 10-year to push higher - perhaps to 4.4% - which represents opportunity for investors.

Fed’s 2% Inflation Goal: A Long, Slow Fight 

Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: "Core PCE". Expectations were for 4.3% YoY - it came at white-hot 4.7%. Where is the problem? Simple... services. And until we see unemployment tick higher... core services inflation will remain sticky. The Fed has a long fight on its hands... and the market is only recently connecting those dots

Managing Risk During ‘FOMO’

There are three important facets to the game of speculating required to make you consistently profitable: (1) understanding your psychology and emotions; (2) a deep understanding of how to manage your risk profile; and (3) access to a wide array of strategies that suit any range of market conditions. Today I think the first of these could be costing a lot of people money... in this case the "fear of missing out". This is a dangerous mindset which 'infects' a lot of speculators... don't let it be you.

Why a Rising US 10-Yr Yield Presents Opportunity

Bond yields are once again starting to rally. Rates are likely to be higher for longer. The US 10-year is now pressing 3.80% - and likely to exceed 4.0% in the coming weeks. The question is how how far will it go? My view is it will unlikely stay above 4.40% for any sustained period. And if anything - will resume it's downtrend in 2024 as we approach recession. That represents an opportunity for investors - here is how I am trading it.

Bonds Realign with the Fed… Not Equities

From the first week of 2023 - bond markets were at odds with the Fed. For example, yields on the 2-year treasury plunged from 4.50% to barely above 4.0% over the past 6 weeks. And yet - the Fed were resolute in their resolve to keep raising rates. Something was amiss. Turns out that bond markets have pivoted and now see 'eye-to-eye' with the Fed that rates are staying higher for longer. Go figure. However, equities are yet to get the memo.... that's risky.

Bonds React to “Higher for Longer“

Bond markets (and the US dollar) appear to be reacting to the likelihood the Fed has 'more work to do' on bringing inflation down to its 2.0% target. For e.g., the US 2-year treasury has surged almost 50 bps the past couple of weeks on stronger than expected economic data (eg surging jobs and higher wages). Meanwhile, JP Morgan's CEO - Jamie Dimon - said it's too early to declare victory on inflation. What does this mean for stocks?