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What if the Fed went a little too far raising rates? What if the Fed should not only stop raising but consider cutting them in the not too distance future? Crazy! Perhaps not as crazy as it may sound, just ask the bonds and currency market what they think, because they have a secret.
In the chart below you can see how much lower the 5-year yield has moved over the past month, while the short-end of the curve and long-end of the curve have remained in place.
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Now with a “tightening” cycle in place, the effective Federal Funds is now higher, then the 3-month treasury bill and the Funds Rate is just 20 bps below the 2-year Treasury, again nearing levels not seen since 2013.
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Does this seem like a Bond market that sees further rate hikes shortly? No, it does not. Either that or the bond market is predicting a recession is on the way, which based on the 2Q GDP of 2.6 percent doesn’t seem likely. Nor does it look like a bond market that fears a Fed that is about to unwind its massive balance sheet, with rates on the long-end of the declining pretty steadily since the start of the year.
Doesn’t look like a currency market fearing the Fed either. There is a Dollar that melting down, like an ice cube on a stove. While the Euro is surging, something can’t please the ECB.
Inflation? What inflation? Gimme a break is what the market is telling the Fed, they don’t buy it, because there is no inflation.
Bond Markets Secret
You know what else the market knows, a German 2-year trades at -68 Bps, and a Japanese 10-Year trades at 0.06 bps, it knows there are gonna be plenty of buyers around to buy every single bond the Fed sells. That is if they sell them.
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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.