New high 2y yield 3.46. Bonds also breaking
August 29, 2022
–Bonds breaking even as stocks continue to decline. Powell disabused the market of thoughts that eases will shortly follow front-loaded tightening. As of this writing on Monday morning the red SOFR pack (SFRU3, Z3, H4, M4) is printing down 13.5 bps. Near one-year spreads have rallied; if the Fed isn’t going to pivot then those spreads should be less negative (or maybe even positive). SFRZ2/Z is printing -19, a new recent high, up 7.5 on the day. SFRU2/SFRU3 is positive 48, also a new recent high. The low in mid-July had been negative 31.5.
–Friday brings the employment report. Last time out, NFP was a whopping 528k and is expected at 310k this time, but it’s a lagging indicator. All the start-ups that have been hiring like mad to garner market share while burning cash are facing MUCH tighter financial conditions.
–In Q4 2018, Powell had said the Fed was nowhere near neutral (as the FF target was the same as it is now) and QT kicked up to $50 billion per month. SPX fell 20% by the end of the year, which stopped Fed hiking cold. In September QT will kick up to $95 billion. As of Friday SPX was down 15.4% ytd, 20% would be around 3840. The low so far this year is 3637. High so far this year in the 30y is 3.43%. It is currently 3.25% while the 2yr has made a new high for the year just above 3.46%.
