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Bond Yields In “Multiple Inversions” But What Does It Mean?

Many of the pandemic era economic metrics are unprecedented and the recovery is no exception. Huge demand combined with supply shocks not seen in generations stoking inflation. The Fed’s aggressive rate hike stance is pushing short term Treasury yields up (1 month to 3 year terms), while investors are buying 5 – 30 year bonds, betting on slowing growth. The 3 year bond is at 2.49%, higher than the 5, 7, and 10 year bonds. The highly watched 2 and 10 year bond spreads inverted yesterday for the first time since September 2019 (and the 2 year and 30 year very briefly inverted).

Floating rate expectations are climbing: 30 day term SOFR sits at 0.31%, the forward curve indicates expectations of it hitting 2.37% by year end (8 x 0.25% Fed increases). The German 10 year Bund which was in negative territory at the beginning of this month is now at 0.66%, further eroding the “relative value” trade in the US Treasury. The inverted yield curve is often a predictor of a recession (average time from inversion to recession: about 18 months). Or,is this just a bet that the Fed increases will slow growth but not push us into recession? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners