The Nasdaq 100 dropped after US retail sales saw a classic ‘good news is bad news’ scenario unfold. While equity markets sold off, buying of Treasury bonds occurred after the data.
Treasury yields past 2-years dropped with demand for bonds increasing, particularly further out on the curve. The benchmark 10-year note shaved 8 basis points (bps) yesterday, while the 1- and 2-year bonds added a couple of bps.
This has pushed the US 2s 10s yield curve spread to its most inverted ever at -0.67 bps.
Previously, an inverted yield curve has sometimes been a harbinger of a recession, although this is not always the case. It should be noted though that past performance is not indicative of future results.
The 1- and 2-year part of the curve are mostly driven by short term rates. These are largely impacted by the target rate of the Federal Reserve.
Futures and swaps markets have priced in a 50bps lift in the target rate at the December Federal Open Market Committee (FOMC) meeting. This would be step back from the 75 bps at their last meeting but is still a tightening of financial conditions.
A continuing development that was added to overnight is happening at the back end of the curve. The 20- and 30-years bond yields have not gone as low as the 10-year bond.
This could imply that the 10-year is at the belly of the curve. Demand at this tenor might be telling us something about a possible rotation in asset allocation. Most government bond funds have a mandate that is based around the duration of the 10-year bond.
Demand at this part of the yield curve that is occurring at the same time that the selling of equities is taking place could be an indication of investor rotation.
The Fed is trying to tighten financial conditions and companies that rely on debt and fresh rounds of capital raising could find this environment challenging. A large percentage of technology companies might fall into this category.
The earnings season just passed has not been kind to technology stocks in general. Investors might be considering their exposure to technology stocks in the face of a hawkish Fed, even if the jumbo-sized hikes are not forthcoming.