Long-dated US Treasury yields have been erratic this year and the 10-year Treasury yield exceeded 3.5% this week for the first time in a decade. After the Fed’s 75bps (basis points) rate hike, 10-year bonds hit 3.642% and two-year Treasuries jumped a 15-year high to 4.090%. The curve between the two and 10 year notes indicates that the chances of a deep recession in the United States have strengthened and recent reports say that bond traders have had to “face the wildest volatility of their careers”.
2 quarters of negative GDP, hot inflation and extremely volatile T-notes
At the end of July, after the second consecutive quarter of negative gross domestic product (GDP), some economists and market strategists pointed out that the United States is in recession. However, the Biden administration disagreed, and the White House published an article calling it the start of a recession from the perspective of the National Bureau of Economic Research. In addition, scorching inflation has devastated Americans, and market analysts believe that rising consumer prices also indicate a recession in the United States.
One of the biggest signals, however, is the yield curve which measures long-term debt with short-term debt by tracking two-year and 10-year Treasury yields. Many analysts believe that an inverted yield curve is one of the strongest signs of a recession. The inverted yield curve is unusual but not in 2022 as bond traders faced a crazy trading environment this year. This week, two-year and 10-year Treasury bond (T-note) yields broke records as the 10-year T-note broke 3.5% on September 19, for the first time since 2011. On the same day, the two-year T-note T-note hit a 15-year high reaching 3.97% for the first time since 2007.
Despite the fact that such bond market volatility is usually a sign of a weakening economy in the US, professional traders say the bond markets have been exciting and “fun”. Bloomberg authors Michael MacKenzie and Liz Capo McCormick argue that bond markets are “characterized by sudden and radical daily swings that are typically a favorable environment for traders and dealers.” Paul Hamill, the head of global distribution of fixed income, currencies and commodities at Citadel Securities agrees with the Bloomberg reporters.
“We’re right in the spot where rates are a really attractive market, with customers excited about trading,” Hamill explained on Wednesday. “Everyone spends all day talking to customers and talking to each other. It was fun. ”
Sovereign risk rises, yield curve between 2-year and 10-year T-Notes slips to 58bps – BMO Capital Markets analyst says “investors are running out of havens”
However, not everyone thinks that stock and bond market volatility is just fun and play. Bubbatrading.com chief strategist Todd ‘Bubba’ Horwitz recently said he expects to see “a 50 to 60 percent haircut” in the stock markets. Recent fluctuations in US Treasury yields have provided market strategists with reasons to be concerned about looming economic problems. During the first week of September, Lead-Lag Report publisher and portfolio manager Michael Gayed warned that the erratic bond market could trigger a sovereign debt crisis and “several black swans”.
Studies and empirical evidence show that a volatile US Treasury bill market is not good for foreign countries holding US T-notes and facing significant debt problems. This is because when US T-notes are used for restructuring purposes and a resolution tool, “sudden and radical daily fluctuations” can punish countries seeking to use these financial vehicles for debt restructuring. Additionally, since the Covid-19 pandemic, massive U.S. stimulus programs, and the Ukraine-Russia war, sovereign risk has increased across the board, in a myriad of countries around the world.
On Wednesday, Bloomberg authors MacKenzie and McCormick also sued Ian Lyngen, the head of US rate strategy at BMO Capital Markets, and the analyst noted that the existence of so-called financial safe havens is dwindling. “This will be a defining week for Fed rate expectations from now until the end of the year,” Lyngen said just before the Fed hiked the federal funds rate by 75 basis points. Lyngen noted that there is a “[sense of investors] not wanting to be along the market. As we move into a truly aggressive monetary policy stance, investors are running out of havens. ”
On Thursday, the yield curve between the 2-year and 10-year T-notes slipped to 58bps, a low not seen since the deep lows in August and then 40 years ago in 1982. As of this writing, the curve in yields between the two- and 10-year T-notes is down 0.51%. The cryptocurrency economy has dropped 0.85% in the past 24 hours and is climbing back to $ 918.12 billion. The price of gold per ounce fell 0.14% and silver fell 0.28%. Equity markets opened lower on Thursday morning as all four major indices (Dow, S & P500, Nasdaq, NYSE) posted losses.
What do you think of the erratic bond markets in 2022 and the signs that the economy and safe-haven assets are unreliable these days? Let us know what you think about this topic in the comments section below.
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