Long-dated U.S. Treasuries yields have been fluctuating this year. The 10-year Treasury yield reached 3.5% this week for the first ever time in a decade. Following the Fed’s 75bps (basis points) rate hike, 10-year notes reached 3.642% and two-year Treasury notes jumped to a 15-year high at 4.090%. The curve between the two- and 10-year notes indicates the chances of a deep U.S. recession have grown stronger, and recent reports say bond traders have been “confronted with the wildest volatility of their careers.”
2 quarters Negative GDP, Red Hot Inflation and Extremely Volatile TF-Notes
A number of analysts and market strategists argued that the U.S. is currently in recession, following the second consecutive quarter marked by negative gross domestic product. However, the Biden administration disagreed and the White House published an article which defines the start of a recession from the National Bureau of Economic Research’s perspective. Red-hot inflation is causing havoc in America, and analysts think that the rising prices of consumer goods also indicate a possible recession.
However, the yield curve, which compares long-term debt to short-term, by monitoring the two- and 10-year Treasury note yields, is one of most significant signals. An inverted yield curve, according to many analysts, is the most reliable indicator of a recession. Inverted yield curves are not unusual in 2022. Bond traders have had to deal with crazy trading conditions this year, so the inverted yield isn’t an uncommon sign. Two-year Treasury note yields (T-note), for both 10-year and 10-year, broke records. The 10-year Treasury Note T-note reached 3.5% on September 19th, the highest level since 2011. Two-year T notes reached an all-time high of 3.9% for the first 15 years since 2007.
Despite the fact that such bond market volatility is usually a sign of a weakening economy in the U.S., professional traders claim bond markets have been exciting and “fun.” Bloomberg authors Michael MacKenzie and Liz Capo McCormick say bond markets are “characterized by sudden and sweeping daily swings that are typically a favorable environment for traders and dealers.” Paul Hamill, the head of global fixed income, currencies, and commodities distribution at Citadel Securities agrees with the Bloomberg reporters.
“We are right in the sweet spot of rates really being an interesting market, with clients being excited to trade,” Hamill explained on Wednesday. “Everyone is spending all day talking to clients and talking to each other. It’s been fun.”
Sovereign Risk Rises, Yield Curve Between 2- and 10-Year T-Notes Slips to 58bps — BMO Capital Markets Analyst Says ‘Investors Are Running out of Havens’
But not all people think that bond and equity market volatility are fun. The chief strategist at bubbatrading.com, Todd ‘Bubba’ Horwitz, recently said that he expects to see “a 50 to 60 percent haircut” in equity markets. Market strategists have reason to worry about the potential economic crisis arising from recent U.S. Treasury yield fluctuations. During the first week of September, Lead-Lag Report publisher and portfolio manager, Michael Gayed, warned that the erratic bond market could spark a sovereign debt crisis and “several black swans.”
Evidence and studies show that the U.S. Treasury Note market volatility is detrimental for countries dealing with large debts or holding U.S. Treasury T-notes. That’s because when U.S. T-notes are leveraged for restructuring purposes and a resolution tool, “sudden and sweeping daily swings” can punish countries trying to use these financial vehicles for debt restructuring. Due to the Covid-19 pandemic and massive U.S. stimuli programs as well as the Ukraine-Russia war sovereign risk has risen across all countries.
MacKenzie & McCormick, Bloomberg’s authors, quoted Ian Lyngen from BMO Capital Markets. The analyst said that there is less of so-called “financial safe havens”. “This will be a defining week for Fed rate expectations between now and the end of the year,” Lyngen said just before the Fed raised the federal funds rate by 75 basis points. Lyngen remarked that there’s a “[sense of investors]The market is too short. As we shift to a truly aggressive monetary policy stance, investors are running out of havens.”
The yield curve of the T-notes for the 10- and 2-year-olds fell to 58bps on Thursday. This is a new low since 1982, when it was at its lowest point. As of this writing, the yield between the 10-year and two-year T-notes has fallen 0.51%. The crypto economy fell 0.85% in the last 24 hours to $918.12billion. Gold’s price per ounce is down 0.14% and silver is down 0.28%. Equity markets opened lower on Thursday morning as all four major indexes (Dow, S&P500, Nasdaq, NYSE) have printed losses.
How do you feel about the uncertain bond markets of 2022? What are your thoughts on the signs that the economy is not reliable these days and how does this affect the safety havens and the economy? Comment below and let us know how you feel about the subject.
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