Long-term US Treasuries yields have been erratic this year and this week the 10-year Treasury yield surpassed 3.5% for the first time in a decade. Following the Fed’s 75bps (basis points) rate hike, 10-year notes hit 3.642% and two-year Treasury notes rose to a 15-year high of 4.090%. The curve between the two- and 10-year notes suggests the likelihood of a deep U.S. recession is intensifying, and recent reports say bond traders have been exposed to “the most volatility of their careers.”
2 quarters of negative GDP, red-hot inflation and extremely volatile T-bills
At the end of July, after a second consecutive quarter of negative gross domestic product (GDP), many economists and market strategists emphasized that the United States was in recession. However, the Biden administration disagreed, and the White House released a report from the National Bureau of Economic Research stating that the recession had begun. Additionally, red-hot inflation is wreaking havoc on Americans, and market analysts believe rising consumer prices are a sign of an economic downturn in the United States.
One of the biggest indicators, however, is the yield curve, which measures long-term debt versus short-term debt by tracking the yield on the two- and 10-year Treasury notes. Many analysts believe that an inverted yield curve is one of the strongest indicators of an economic downturn. An inverted yield curve is unusual as bond traders have been dealing with a crazy trading environment this year, but not in 2022. This week, the two and 10-year Treasury notes (T-notes) broke records for the first time since 2011, when the 10-year T-note surpassed 3.5% on September 19. On the same day, the two-year T-note hit a 15-year high of 3.97% for the first time since 2007.
Although this kind of bond market volatility is a sign of a weakening economy in the U.S., professional traders say bond markets are exciting and “exciting.” Bloomberg authors Michael McKenzie and Liz Capo McCormick said bond markets are “characterized by sudden and daily fluctuations, making it a comfortable environment for traders and traders.” Paul Hamill, head of global fixed income, currencies and commodities at Citadel Securities, agrees with Bloomberg reporters.
“We’re at a very interesting price point,” Hamill said Wednesday. “Everybody spends all day talking and talking to customers.” It was fun.”
Sovereign risk increases, yield curve between 2- and 10-year T-Notes slips to 58bps – BMO Capital Markets Analyst ‘Investors running out of haven’
However, not everyone thinks that equity and bond market volatility is all fun and games. Todd ‘Bubba’ Horwitz, chief strategist at bubbatrading.com, recently said he expects to see a “50 to 60 percent haircut” in equity markets. Recent fluctuations in US Treasury yields have given market strategists reasons to worry about the looming economic issues. In the first week of September, Michael Guide, publisher and portfolio manager of the Lead-Lag Report, warned that a distorted bond market could trigger a sovereign debt crisis and “multiple black swans”.
Studies and empirical evidence show that a volatile US Treasury note market is not good for foreign countries holding US T-notes and dealing with significant debt issues. Because US T-notes are used for restructuring and resolution tools, “sudden and unexpected daily activities” can punish countries that try to use these financial vehicles for debt restructuring. In addition, with the Covid-19 pandemic, massive US stimulus programs, and the Ukraine-Russia war, sovereign risk across the board has risen in many countries around the world.
On Wednesday, Bloomberg authors Mackenzie & McCormick quoted Ian Lingen, head of U.S. price strategy at BMO Capital Markets, as the analyst pointed out that the existence of so-called financial security is waning. “This is going to be an expected week for Fed rate hikes between now and the end of the year,” Lingen said before raising the federal funds rate by 75 basis points. Lingen said:[sense of investors] Reluctance to go long in the market. As we move into a truly hawkish monetary policy stance, investors are running out of safe havens.
On Thursday, the yield curve between two- and 10-year T-notes fell to 58bps, the lowest level seen in August and 40 years ago, in 1982. Between two and 10-year T-notes fell 0.51%. The crypto economy has decreased by 0.85% in the last 24 hours and is on the verge of $918.12 billion. Gold was down 0.14% per ounce and silver was down 0.28%. Equity markets opened lower Thursday morning as all four major indexes (Dow, S&P500, Nasdaq, NYSE) posted losses.
In the year Do you think the bond markets in 2022 and the signs that the economy and safe havens are unreliable these days? Let us know what you think about this in the comments section below.
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