Fed Chairman Powell has tipped the US yield curve into an unknown zone!
Fed Chairman Powell shifted the U.S. Treasury yield curve into its steepest inversion ever after his hawkish remarks to Congress. He deliberately opened the door to a higher terminal rate and a 50 basis point increase at the March FOMC meeting! The market reaction was quite brutal, with the 2-year U.S. Treasury yield rising above 5% for the first time since 2007, while the spread between the 2-year and 30-year yields reached -115 basis points for the first time ever. It will be interesting to see if Powell confirms today his comments from yesterday before the House Financial Services Committee. Source: Bloomberg
Stocks and Treasuries are very correlated again
Source: Goldman Sachs, The Market Ear
Highest default rate in the US High Yield market since september 2021!
There is some stress building in the U.S. high yield bond market, with the highest default rate since September 2021 occurring in January! While the default rate remains low (2.2% in January), U.S. high yield corporates are being downgraded at their fastest pace since 2020. A sign of future economic deterioration? Source: Bloomberg, Moody's.
The entire US Treasury yield curve back above 4% !
What a change in one month! The 10-year U.S. Treasury yield has risen about 70 basis points in one month and the entire U.S. Treasury yield curve is now trading (each key rate) above 4%. Recent economic and inflation data has caused investors to revise their outlook on U.S. monetary policy. A terminal rate of 5.5% is now expected by September and no cut in 2023. Note that for the first time, fed fund futures prices are forecasting a higher rate for the March 24 futures contract than for the March 2023 contract. Source: Bloomberg
The market now expects the ECB to raise its key rate at the highest level ever!
As reflected in the European swap market, market participants expect the ECB to raise its key interest rates to a level never before seen. The terminal rate is expected to be close to 4%, up from 3.75% in the early 2000s. Interestingly, for the first time in this cycle, the markets believe that the terminal rate will be reached in 2024 (and not in 2023). Higher rates for longer? Source: Bloomberg.
Global bonds have officially erased all YTD gains
Source: Bloomberg
A 60/40 Portfolio remains 14% below its all-time high
A 60/40 Portfolio of US stocks/bonds is currently in a 14-month drawdown, 14% below its all-time high. This is the longest drawdown for a 60/40 portfolio since the financial crisis (37 months) and before that the aftermath of the dot-com bubble (43 months). Source: Charlie Bilello
The yield on German 2-year bonds reached 3% for the first time since 2008!
While yesterday the Eurozone core CPI reached a new record of 5.3%, the German 2-year bond yield reached 3% for the first time since 2008! The ECB still has a lot of work (more than currently expected?) to do in tightening monetary policy to curb inflation, especially considering the minor impact (for now) of the Fed's monetary policy tightening on US inflation and the economy. Source: Bloomberg
