The yield on the 2-Year U.S. Treasury hit a new high yesterday.
Why does this matter?
Because…
1) It indicates the Fed’s fight to tame inflation is NOT done.
2) Stocks are in for a world of hurt in the coming months.
Regarding #1, back in May 2023, the 2-Year U.S. Treasury was anticipating that the Fed would have rates at 3.75% in May of 2025. At the time, this meant the Fed would cut rates at least two times before May of 2025 (rates were at 5.25% in May 2023).
Fast forward to today, and the 2-Year U.S. Treasury has just broken out to new highs of 5.20%. This means the market is now anticipating that the Fed will have cut rates possibly ONCE by October of 2025. Moreover, the idea that rates will be ABOVE 5% instead of BELOW 4% in late 2025 is a HECK of a shift.
Put simply, the bond market is figuring out that the Fed will need to keep rates MUCH higher for MUCH longer. And this brings us to #2 in our list above.
Stocks are in for a world of hurt.
Stocks are priced based on Treasury yields. This is one of the primary reasons why stocks remain down almost 10% from their all-time highs despite the fact the economy is growing. After all, if you can earn 5.25% risk free in bonds for two years, why risk putting your money into much riskier stocks where both the earnings yield AND the dividend yield are lower (4.07% and 1.62%, respectively).
The fed will over react to the market collapsing and will drop interest rates which will cause massive deflation
Nope 9:13, the feds will not drop interest rates for at least 2 years.