Faced with the highest level of inflation data in 39 years, the Fed has had to speed up the tightening of monetary policy and is preparing for a new cycle of interest rate hikes.
Meanwhile, bond traders are betting that accelerated rate hikes will dampen economic growth and the U.S. Treasury yield curve flattens.
However, stocks were not afraid of inflation to continue the trend of explosion, and the three major stock indexes ended a three-year cloud on Friday, and the S&P 500 index closed at a record high. Analysts say they disagree that overly aggressive measures by the Fed and other central banks will stifle the recovery.
The narrowing spread between the 5-year and 30-year Treasury yields during the quarter is now near its flattest level since March 2020, suggesting that bond traders are betting that an accelerated rate hike will dampen economic growth. As of Friday's close, the 5-year Treasury yield was 1.253% and the 30-year Treasury yield was 1.882%.
Bloomberg noted that the market predicts that if the Fed starts raising interest rates in mid-2022, the US Treasury yield curve will be at the flattest level in this generation when the Fed tightening begins. The current two-year and 10-year Treasury spreads are around 83 basis points.
Both flattening us Treasury yields and long-term yield levels suggest that investors believe central banks can't do much until they stop easing, and that an economy is likely to emerge if the supply chain crisis remains unresolved and factors such as the spread of Omikeron continue to threaten recovery.
Yields across the curve are well below the Fed's long-term policy rate forecast of 2.5 percent, and even lower than the 1.8 percent forecast for 2024, which the Fed will update next Wednesday.
According to a Bloomberg article, Julia Coronado, president of research firm MacroPolicy Perspectives, said the yield curve will be a factor for the Fed to consider. She said:
"It's a leading indicator of the economy. It doesn't make everything right, but you also don't want to ignore it entirely. ”
Separately, the U.S. five-year break-even rate was 2.80 percent on Friday, suggesting inflation is above policymakers' 2 percent target for the coming years. Such an outcome would allow investors to reduce discounts on regular Treasuries, which currently yield less than 1.5 percent.
While the bond market is anxious about the Fed's tightening of policy, the supply chain crisis remaining unresolved, and the spread of TheOmilon, the stock market is staging a new round of revelry.
On Friday, the three major stock indexes ended a three-year streak, with the S&P 500 closing at record highs. As of the close, the Dow was up 0.6 percent at 35,971.0; the S&P 500 was up 1 percent at 4,712.0; and the NASDAQ was up 0.7 percent at 15,630.6.
Many said that the stock trading was buoyant, in part related to the strong economic recovery.
According to Bloomberg, Brian O'Reilly, head of market strategy at fund firm Mediolanum International Funds, said: "This (the bond market) is a prediction that short-term interest rates will rise, and the risk that too aggressive moves by the Fed and other central banks could stifle the recovery." "That's what the bond market is saying. I don't necessarily agree. ”
In addition, strategists at Ned Davis Research, a quantitative analysis research firm, say there's good reason for the yield curve to flatten as economic growth slows. This suggests that large-cap stocks will beat smaller peers, and steadily growing stocks will outperform cyclical value stocks in 2022.
O'Reilly also noted that the Fed's tightening of policy could dampen big risky investments in speculative technologies. However, economic data suggests that the Fed's decision may not prevent the recovery.
"We have to remember the degree of easing of monetary policy. The 11 million job openings in the U.S. don't mean the Fed is wrong. ”
The Labor Department's Job Vacancies and Labor Mobility Survey, released on Wednesday, showed that the number of available jobs increased to 11 million from an upward revision of 10.6 million in September. Meanwhile, the turnover rate fell to 2.8 percent from a record 3 percent last month, the first decline since May, indicating that employers are having more success in retaining employees.
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