Yields on long-term U.S. Treasuries have been volatile this year, with the 10-year Treasury note yield hitting a 10-year high of 3.5% this week. .642%, while the 2-year note surged to a 15-year high of 4.090%.The curve between the 2-year and 10-year note indicates that the likelihood of the U.S. falling into a severe recession has strengthened, and recent reports have said that bond traders “faced the wildest swings of their careers.”
Two quarters of negative GDP, red-hot inflation, and extremely volatile t bonds
At the end of July, after two consecutive quarters of negative gross domestic product (GDP), many economists and market strategists stressed that the United States had entered a recession. However, the Biden administration disagreed, and the White House released a paper defining the beginning of a recession from the perspective of the National Bureau of Economic Research. Furthermore, red-hot inflation has hit Americans hard, and market analysts believe that rising consumer prices also point to a U.S. recession.
But one of the biggest signals is the yield curve, which measures long-term and short-term debt by monitoring the twoandyield on the 10-yearTreasury bond yield on the 28-year bond. Many analysts believe that an inverted yield curve is one of the strongest signals pointing to a recession. While yield curve inversions are rare, they are unlikely in 2022 as bond traders deal with an unusual trading environment this year. The yields on the 2- and 10-year Treasuries set records this week, with the 10-year T-note breaking 3.5% on September 19 for the first time since 2011. The 2-year Treasury yield also hit 3.97%, the highest level in 15 years since 2007.
Even though such bond market volatility is usually a sign of a weakening U.S. economy, professional tradersinsist that the bond market is exciting and “fun.”Bloomberg authors Michael McKenzie and Liz Capo McCormick say that the bond market is “characterized by abrupt and wide-ranging daily fluctuations and is usually a favorable environment for traders and dealers.” Paul Hamill, head of global fixed income, currency, and commodity distribution at Citadel Securities, agrees with the Bloomberg reporter.
“We are in a sweet spot where interest rates is a really interesting market and clients are excited about trading,” Hamill explained Wednesday. That’s fun.
Sovereign risk rises, 2- and 10-year yield curves fall to 58 bps – BMO Capital Markets analysts say “investors are losing their refuge”
But stock and bond market Not everyone thinks that volatility is all fun and games. bubbatrading.com chief strategist Todd ‘Bubba’ Horwitz recently said he expects “50-60% haircuts” in the stock market. Recent volatility in U.S. Treasury yields has given market strategists reason to be concerned about looming economic problems, and in the first week of September, Lead-Lag Report publisher and portfolio manager Michael Gade said that an unstable bond market could trigger a sovereign debt crisis and “some black swans,” he warns.
Studiesandempirical evidenceshow that an unstable US bond market is not good for foreign countries that hold US T-bonds and are dealing with significant debt problems. That is because if U.S. T-bonds are utilized for restructuring purposes or resolution measures, “sudden and widespread daily fluctuations” could punish countries that attempt to use these financial instruments for debt restructuring. Moreover, since the Covid-19 pandemic, the massive U.S. stimulus package, and the Ukraine-Russia war, sovereign risk around the world has risen across the board.
On Wednesday, Bloomberg authors McKenzie and McCormick also quoted Ian Lingen, head of U.S. interest rate strategy at BMO Capital Markets, who noted that analysts are seeing the so-called financial safe havens fading. Just before the Fed raised the federal funds rate by 75 basis points, Lingen said, “This week will be a defining week for Fed rate expectations between now and the end of the year.” Lingen said, “It feels like [investors] don’t want to be long the market. As we move to a truly aggressive monetary policy stance, investors are losing their flight.”
On Thursday, the yield curve between the 2-year T-bond and the 10-year T-bond fell to 58 bps, a deep low in August and a level not seen since 40 years ago back in 1982. At the time of writing, the yield curve between the 2-year T-bond and the 10-year T-bond is down0.51%. The crypto economy is down 0.85% over the past 24 hours and coasting at $91.812 billion. The price per ounce of gold is down 0.14% and silver is down 0.28%. The stock market opened lower Thursday morning with all four major indices (Dow, S&P500, Nasdaq, and NYSE) printing losses.
What do you think about the volatile bond market in 2022 and recent signals that the economy and safe havens are not reliable? Let us know what you think about this subject in the comments section below.
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