Late on Sunday, when noting the rapidly spreading contagion from the Fed's tightening posture, which sent tech stocks plunging, the dollar soaring, collapsed the yen and forced the world's second most important currency, the Yuan, to crater in just days (a violent move few were talking about), we said that as markets were puking Treasurys on fears of stagflation, the right move now was to do the opposite and go all in duration, i.e., Treasurys, to wit: "This is where you quietly start waving in every ounce of duration with both hands and on margin."
This is where you quietly start waving in every ounce of duration with both hands and on margin. pic.twitter.com/Q6EqJeYCHr— zerohedge (@zerohedge) May 9, 2022
Just 4 days later, bonds have exploded higher and yields have tumbled, as the plunge in risk appetite over a looming recession (which is now almost priced in), has sent the yield on 10Y TSY down to 2.82% this morning from 3.15% on Sunday..
... German bunds are down a similar amount...
... and Italian bonds are also rallying; the 10-year yield is 13 basis points lower at 2.77%, as the odds of an ECB hike are collapsing as the odds of a recession are soaring.
And as yields tumble, this means that the 2s10s yield curve is about to re-invert! Here is BBG's David Finnerty:
The US yield curve appears destined to invert again in coming weeks after Wednesday’s CPI data confirmed the inflation genie is well and truly out of the bottle. Two-year yields should advance higher with the Fed likely to push rates well above neutral rate, given both headline and core CPI beats showing the inflation problem is not going away any time soon. Former New York Fed President Bill Dudley says the central bank should hike to 5% or higher to curb inflation.
Meanwhile, longer-term yields may advance in reaction to the underlying inflation, although they will likely outperform their shorter-term counterparts as growth fears and declining equities help reduce any selloff in that tenor
It will only be fitting that with both the Biden admin and the Fed desperate to plunge the US economy into a recession that it suffers not one but two concurrent recessions.
As for the Fed's inevitable response to the coming recession, one can only imaging how many trillions the next QE will be...