The US 2s10s curve dis-inverted on Monday, however briefly.
Amid a bout of extreme global risk-off sentiment blamed on mounting US recession fears and an epochal carry unwind, two-year Treasury yields tumbled another 20bps ahead of the opening bell on Wall Street, extending last week’s extraordinary front-end rally.
Although 2s retraced the move entirely by the end of the day, they were around 3.66% at the lows when 10s were 3.67%, marking the first time since the summer of 2022 that the US 2s10s wasn’t inverted.
Had Monday’s front-end rally held, it would’ve meant two-year US yields were down ~70bps in just five sessions.
That’s an aggressively dovish move. You’d think the world was ending. You’d also think that from Japanese equities, which plunged more than 12% to start the week in the single worst day for local shares since 1987.
Remember: It’s not the curve inversion you should fear, but rather the re-steepening. The 2s10s was -50bps in late June. Above water by August 5 marked a pretty rapid ascent and underscored the notion that when inversions turn, they turn fast.
Have a look at the updated figure below, which just shows the US inversion with the yen.
Suffice to say we’re witnessing a rapid regime shift across global markets, and it’s upended risk sentiment entirely.
“We’re left to ponder whether a shift above zero in 2s10s will be the end of inversion or simply a momentary reprieve from one of the most enduring facets of the current rates cycle,” BMO’s Ian Lyngen and Vail Hartman said on Monday morning.
Fed-cut pricing looked completely detached from macro reality. 50bps at the September meeting was priced as a lock, and traders were betting on an imminent emergency cut.
How likely is such a scenario? That is: What are the odds that Jerome Powell, just days removed from eschewing an opportunity to deliver a so-called insurance cut, convenes the FOMC for an inter-meeting move in response to turmoil in financial assets?
I don’t know what those odds are, frankly. Surely not as high as the market was assigning on Monday. But do note: The last time 2s were as far below Fed funds as they were on Monday morning was 2008.
That’s a pretty daunting optic, and it suggests the Fed’s now very far behind the curve.
“The magnitude of the current [risk asset] selloff hasn’t risen to the level at which one should anticipate the FOMC would need to offer a policy response [but] in the event [it’s] just beginning, there is, of course, a downside level for stocks at which the Fed would consider an inter-meeting cut,” BMO’s US rates team went on.
That’s not the bank’s base case, of course. But BMO — and they weren’t alone on Monday — did concede that should things unravel entirely, anything’s possible. “[I]f stocks are down 25%-30% over the course of the next few sessions, one would be remiss not to at least consider whether Powell would be more aggressive and cut early,” Lyngen added.
The FOMC will make an emergency cut, if market liquidity breaks down- that is if the credit markets shut down and companies cannot borrow. Otherwise, they will wait until September. That said a credit freeze is possible, especially as we are in a deleveraging event.
A market crash headed into an election that likely determines if the Fed remains independent. Not great timing Jerome.
Can’t login to my trading account, hopefully this just makes my vxx call even more expensive
Story on bloomberg that corporate deals are being postponed. If that continues this week, you can expect an emergency cut. Right now Powell and FOMC are watching and waiting. It won’t take a week for them to act if it continues though.
Not sure where to put these, so sticking them all here.
NVDA Blackwell delayed (so say reports, tho’ NVDA denies). Will be interesting to see if 3Q cloud capex dips.
ISM Services above cons, New Orders especially. Services is the large majority of the US economy.
10Y down 50 bp in two weeks, 5Y down 60 bp. Should be helpful for housing and commercial RE – and much else.
I have now lived through enough of these periods when markets don’t get what they want and therefore throw a temper tantrum that I am not even panicking (yet).
My strategy is to tighten my seat belt and (once again) ride this out. I have to say, however, feels pretty good having my 90 year old dad in bonds.
I didn’t hear him say it directly b/c I watch CNBC only for laughs, but I did saw across the news feed that Fed member Austan Goolsbee said, “…if the economy deteriorates, the Fed will fix it.” That’s the sort of inane comment by a FOMC member that bamboozles market morons into becoming even more moronic.
His comment also sets up the Fed for failure. What if the Fed has an emergency meeting, cuts, and…the market pauses/spikes up briefly but then keeps going down? Same is true for a 50bps cut in Sept.
Moreover, what if economic conditions show signs of mild deterioration but nothing like the ’08 comparisons sparked by sharp downturns in the market, themselves caused (probably) in large part by deleveraging and the reversal of the various trading strategies that walked the market up and kept vol below average for months? Tell the truth Goolsbee: Educate market participants instead of coddling them, whether Wall Street hedgies way out over their skis or the followers of reddit celebrities. Identify the underlying market conditions that may be contributing to an unwind, tell the public it’s normal, even “healthy,” for markets to periodically sacrifice the excess to improve the odds of longer term stability; and that the “economy” is not equivalent to the market. For good measure, acknowledge the Fed is not an omniscient, omnipotent ‘being’ exercising its power somewhat randomly to stabilize the US stock, options, futures, and bond markets when humans reach an unspecified level of fear.
I did see*
Sorry lol
Been a while since we had some good entertainment in the markets. The rapidity of the moves are certainly daunting, but considering the market is still showing decent YTD returns, I won’t be packing my bags for New Zealand quite yet. Amazing that the Nikkei could lose 22% in three days and still basically be flat for the year.
Crypto also taking a bit of a beating. I’m also still hoping that crypto gets wiped out completely at some point, but I don’t see that happening anytime soon.
All that said, the market will probably be back in the green by the end of the day.
Current events are reminding me of the 1997 Asian Contagion. If past is precedent, the next step would be the collapse of LTCM. Where’s Robert Rubin when you need him?
Maybe Larry Summers is available.
Larry’s always “available.”