The bond market simply isn’t buying it

Treasury yields tried to move up today but cracked back lower. That’s left:

  • 2s -8.3 bps to 4.16%
  • 10s +2 fps to 3.71%
  • 30s +2.7 bps to 3.52%

The first thing to note is the inversion of the yield curve, which is still at 69 bps despite today’s bull flattening. The second thing to note is the rally in 2s and the rate of 4.16%. That’s well below the Fed’s current rate of 4.375% and well below the +5% terminal rate the FOMC forecast in the dots.

In short, this is the market saying hikes aren’t coming, or if they do come, the ensuing recession is going to be harsh.

This view is also reflected in Fed fund futures, which are pricing a terminal top at 4.82% and falling to 4.32% next December.

What I think we’re going to see (or what the market is seeing) is a quicker fall in inflation due to struggling economic activity. Today’s S&P Global PMI showed services in the midst of the worst four-month decline since 2009.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“Business conditions are worsening as 2022 draws to a close, with a steep fall in the PMI indicative of GDP contracting in the fourth quarter at an annualized rate of around 1.5%. Jobs growth has meanwhile slowed to a crawl as firms across both manufacturing and services take a much more cautious approach to hiring amid the slump in customer demand.”

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