U.S. Treasury bonds made new lows for the year again this week, with the 30-year U.S. T-bond sinking to 108.9 and the 10-year T-note hitting 106.11, levels not seen since August 2007. Stock indices were lower this week as well but managed a sizable bounce-back to close the week on Friday. News of more labor openings than expected, and an additional 336,000 jobs added in September, fueled the thoughts of more inflation and a Fed that will have to hike rates again. The old “Good news is bad news trade,” which isn’t a new phenomenon. During times of lower interest rates and quantitative easing (QE) following the mortgage crisis of 2008, the stock market indices traded similarly when good payroll data was reported. Back then it was worries about the economy doing well enough that the carrot of QE would be removed. The difference now is that there is no carrot, only more stick in the form of higher interest rates, if that is indeed what it takes to keep inflation under control. Entering into the fourth quarter of the year with a general sense that the market needs to see signs of a recession in order to look forward to interest rates working lower at some point in the future, it may be that the new trade is, “Good news is bad news and bad news is bad news.”
The good news, if it can be taken as such, is that the yield curve continues to flatten out with the longer-term yields continuing to gain ground on the front end, and if it continues, the inverted yield curve will die. While the yield curve may be flattening out at higher interest rates than what investors have become accustomed to, it is still a necessity. In order to get back on the path of normalcy and traditional investing, participants in the economy will need to see a traditional yield curve to feel safe investing for the long term.
October, 6th 2023
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