Inversion leads to submersion
March 17, 2023
–The FOMC meeting resulted in a 25 bp rate hike and inversion in the 5yr to 10yr which ended at -1. (2.191% in 5s, +7.9 on the day and 2.181 in 10s, +2.3). As the attached chart shows, the red/green (2nd year to 3rd year) euro$ pack spread went to an historic inversion of -23.375 bps. Same with red/gold at -35.5. The red pack (EDM3, U3, Z3, H4) ended -14.125 at a price of 9730 or 2.7%. Apparently FOMC members have felt such incredible pressure from constituents on inflation, that the FF projection for the end of 2022 leapt from 0.9% in December to 1.9% yesterday. January 2023 FF contract accepted that message, falling an incredible 16 bps to 9802 or 1.98%. Rather than being forward looking, our central bank is now being pushed around by news headlines. The yield curve is telling you something that news headlines aren’t.
–A couple of days ago I noted that Sept’23 SOFR contract had a slightly higher yield than the ten year treasury. That has now moved forward in time, with SFRH3 (March’23) at 9767 or 2.33% while 10y is 2.18%. The financial machine is going to have an awfully hard time making money as funding rates exceed the yield on longer dated assets. My guess is that it’s all going to rhyme with Q4 2018, when SPX fell 20% and Mnuchin called the heads of banks to reassure the public that liquidity would be adequate. However, for now, SPX jumped 2.24% yesterday. Remember, that’s how it was at the start of October 2018, when Powell said we’re nowhere near neutral and QT ratcheted up to $50b per month – stocks were at new highs at the end of Sept’18. Of course, at that time we didn’t have the financial dislocations related to sanctions, and it was pre-covid.
–The thirty year bond yield FELL 4.5% yesterday and USM is up another 1-12 this morning at 153-06 with gold up $35/oz to 1945. Silver’s up 79 cents to 25.50. That’s going to much more useful for transactions (like buying a corned beef sandwich and beer) when cyber attacks cripple the grid.
–Happy St Pat’s!
