After an overtly bullish January for both stocks, bonds and credit spreads, last month proved much more challenging as resurgent inflation data, the specter of higher rates for longer and concerns about the real health of consumers and broader economy drove market yields higher and stock prices lower. On the interest rate front, yields on six month and two-year (GT2) Treasury securities both hit cycle highs (5.15/4.91%) this week, with the ten-year (GT10) breaking through 4% for the first time since early November, with yields at 4.08% this afternoon (4.24% cycle high on Oct. 24th). In total, yields jumped 71 and 51 basis points on GT2s and GT10s respectively since the end of January, along with commensurate moves in Federal Funds futures yields further out this year, a key indicator of expected FOMC rate actions, with the terminal rate at a new cycle high of 5.27% for the September 20th contract as of yesterday’s close. Perhaps more importantly, the market has pared back expectations for rate cuts priced into these contracts around the end of 2023, with one, 25 basis point rate cut forecasted by January 2024, a meaningful reversal of the 50-75 basis points in easing implied at various times during the fourth quarter of last year.
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