QI TAKEAWAY — Tread lightly and keep your hedges on. Six-sigma bond market events are rarities, and the Fed appears to be confused and running scared. What’s worse, officials are blatantly intimidated by the yield curve that Powell defied at his last press conference as being no “iron law” that dictated policy. The policy error has been committed, past tense. Now we assess the damage to the real economy.
- Yesterday’s 7.5% YoY CPI headline surpassed consensus expectations of 7.3%, sending the 2-yr Treasury yield up by 23 bps, the biggest one-day move since 2009; the 10-year yield rose by half as much, sending the 2s10s spread to 43 bps, while the 2s10s forward curve inverted
- Silence following the St. Louis Fed’s Bullard expressing openness to a full point hike by July implies an inter-meeting rate hike is not off the table; meanwhile, the 2s10s continues to fall, while correlation with CEO Confidence only grows, from 0.43 last decade to 0.81 since 2020
- Shares of LQD and TIPS, two iShares ETFs that cover IG corporate bonds and inflation-protected Treasuries, have seen steady declines since year-end; duration and inflation protection are being sold off by passive investors in the face of larger-than-expected rate hikes