By Bryan Rich
December 5, 4:00 pm EST
As we continue to creep toward the December 13th Fed meeting, the Fed funds futures are pricing in a 90% chance the Fed will hike by another quarter point.
And now we have a big tax cut package coming. Stocks are up big for the year. Industrial metals are up big for the year. But the benchmark 10 year treasury remains flat.
This has been great news for borrowers. It’s kept the housing market on it’s hot trajectory. It’s kept auto demand going. But the flattening yield curve sends a cautionary message to markets. For those that have been nervous about valuations and the “what could go wrong” scenarios, they lean on the yield curve to support their view, assuming it may be indicating an ultimate inversion (and therefore, recession).
But if we look across the behavior in yields in Europe and the policy actions in Japan, it looks more like a global bpmd market that is being anchored by Japan’s explicit policy to keep the the Japanese 10 year yield at zero.
But in this environment, things can change with the utterance of a few words. And this dislocation in the interest rate market can change quickly — yields can move very aggressively. We’ve already seen this whipsaw, this year…
Yields bounced off of the bottom nearly a quarter of a point in five days.
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