Market convention is to quote the shape of the UST yield curve by looking at 10Y UST v 2Y UST. Every bond trader and bond trading desk does it and in the institutional fixed income world this is what you quote in conversation about the shape of the yield curve. It’s just how you rap in the bond world.
If you really want to know whether the bond market think the Fed is reducing liquidity/jamming on the brakes on the economy it’s very helpful to look at very, very short rates and the difference between implied 3mo T bill rates and actual 3mo T bill rates. The pink shaded areas below are past recessions. Inversion of implied short rates v. actual short rates precede economic recession/contraction.
Does the bond market think we are going to a recession in early 2023? Yes. Do we think we are going to have a recession in early 2023? Yes. Is the equity already braced for an economic recession in early 2023? I think yes. Equity market multiples have already done a big reset and market sentiment has already moved to historic lows. It’s not over yet as volatility will likely persist until the Fed officially pauses – it’s not that far away. Money supply is already cratering, inflation is already coming down across the board, and demand is being destroyed daily via a combination of Fed rates hikes and quantitative tightening (QT). The path forward begins with the Fed changing direction on policy. Maybe not in time for this late December but yes, the Santa Pause is comin’ to town.
Richard Barrett
Chief Investment Officer
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