“We have the setup for a recession unfolding” as the Fed responds to inflation, Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel, said in an interview in Palm Beach, Florida.
Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing
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(Bloomberg) -- The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger interest-rate hikes to cool inflation and the economy.
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Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing
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As swaps traders priced in around a full percentage point of Fed hikes over the next four meetings, the yield on two-year Treasury notes touched 5.08% on Wednesday, its highest level since 2007. Critically, longer-dated yields remained in check, with the 10-year rate under 4% and the yield on 30-year bonds lower.
As a result, the closely-watched spread between 2- and 10-year yields this week showed a discount larger than a percentage point for the first time since 1981, when then-Fed Chair Paul Volcker was engineering hikes that broke the back of double-digit inflation at the cost of a lengthy recession. A similar dynamic is unfolding now, according to Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel.
“We have the setup for a recession unfolding” as the Fed responds to inflation, Griffin said in an interview in Palm Beach, Florida.
Longer-dated Treasury yields have failed to keep pace with the surging two-year benchmark since July, creating a curve inversion that over the decades has amassed a record of anticipating recessions in the wake of aggressive Fed-tightening campaigns.
In general, such inversions
preceded economic downturns by 12 to 18 months. The odds of another
occurrence are intensifying after Powell’s comments indicate he is open
to reverting to half-point rate hikes in response to resilient economic
data. The Fed’s quarter-point hike on Feb. 1 was the smallest since the
early days of the current cycle. . ."
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Deepest bond yield inversion since Volcker suggests hard landing
. . .Dragged down
✓ US stocks extended the decline they’ve suffered over the past month, with the S&P 500 Index notching a 1.5% drop on Tuesday, its biggest in two weeks. Hopes that the Fed might be near the end of its tightening cycle had boosted the gauge by over 6% in January.
✓ Meanwhile the dollar, which tends to benefit from both elevated short-end interest rates and a bid for safety when times are tough, also surged higher Tuesday, with a Bloomberg gauge rising to its highest level since early January.
“It is hard to deny the hawkishness of the statement and the message that markets took away,” strategists at NatWest Markets wrote in a note to clients. Powell “firmly opened the door” for a return to 50-basis-point moves, although he emphasized the importance of upcoming data releases, which are “likely to be high vol events,” according to strategists Jan Nevruzi, John Briggs and Brian Daingerfield.
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Powell told members of Congress on Tuesday that there are “two or three more very important data releases to analsze” ahead of the March deliberations, and “all of that will go into making the decision.” . .
✓ Some investors think a recession can be averted even as growth slows. Either way, longer-dated Treasuries are viewed as a viable shelter with the Fed still raising rates.
Short-maturity yields are the “most vulnerable to repricing higher,” especially if wage growth resumes rising, favoring a half-point rate increase, said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investments. That will drive “more flattening pressure on the curve.”
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