-
The 2-year Treasury yield has been swinging wildly and “acting like a stock meme,” a top John Hancock strategist said Tuesday.
-
The inverted yield curve tells the Fed that it is making a mistake by not cutting interest rates, said strategist Emily Roland.
-
The “Teflon” job market is a bright spot in the US economy, but cracks are showing, he said.
The 2-year Treasury yield has moved similarly to meme stocks because investors are unclear about how the Federal Reserve will move on interest rates this year, a top strategist at John Hancock Investment Management said Tuesday.
“There’s nothing like a deeply inverted yield curve to tell you you’re making a mistake and that’s exactly what’s happening here. The bond market is all over the place,” Emily Roland, co-head of investment strategy at John Hancock Investment Management, he told Bloomberg TV during an interview.
“When the two-year Treasury yield acts like a stock meme, there’s a lot of uncertainty here around Fed policy,” he added.
Large price fluctuations over short periods are typically associated with so-called meme stocks, including GameStop and AMC, which have found favor with retail investors. But the 2-year yield, which moved around 4% on Tuesday, has been on a roller coaster since early March. That performance is sensitive to expectations around the Fed’s monetary policy.
Just last week, it fell to 3.6% and then topped 4% after a mix of weaker-than-expected economic data was rounded out on Friday by the March jobs report, which showed some cooling in a labor market. still solid.
The noise in the market comes from inconsistent economic data messages in a late-cycle environment, the “toughest” part of the cycle, Roland said. The 2-year yield at 4% was higher than the 10-year yield at 3.43% on Tuesday, maintaining an inverted yield curve that is widely seen as a sign of an impending recession.
Roland said the bond market is pricing in a 25 basis point rate hike in May, followed by three rate cuts totaling 75 basis points in 2023.
“The Fed says that they are not going to cut until 2025. The Fed is not going to tell them that they are making a mistake, but that is what it seems to us,” he said.
The yield topped 5% in early March for the first time since 2007 after Federal Reserve Chairman Jerome Powell suggested that policymakers could increase their March rate hike to 50 basis points to combat stubbornly high inflation. .
The yield moved lower after Powell backed down from that stance. Soon after, Silicon Valley Bank and Signature Bank failed, driving the yield to a low of 3.55% in late March as investors expected the Fed to cut rates in response to the banking crisis that erupted around to regional lenders, including First Republic Bank.
Jobs will be the ‘last shoe to drop’
The “Teflon” job market is a bright spot in the US economy, but cracks are showing, Roland said. Layoffs in March, tracking the Challenger report, were up 300% year-over-year, and initial claims for jobless benefits are rising.
The lagged impact of Fed tightening will ultimately affect the labor market, which is “the last shoe to fall in a cycle,” he said.
Markets are watching as corporate profits come under pressure, prompting companies to lay off workers to protect their margins. “And then we need to see those layoffs translate into unemployment data. That goes up, and then the Fed can cut and we can start the new cycle,” he said.
Until then, “we’re stuck in the endless end-of-cycle period right now. It’s really difficult and confusing for investors,” the strategist said.
Read the original article on Business Insider