Breadth divergence is a troubling sign for the stock market

U.S. yield curve most inverted in 15 years

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Bond yields fell on Tuesday as investors sought the safety of government debt amid floundering equity markets and lingering global growth concerns ahead of crucial U.S. inflation data.

What’s happening
  • The yield on the 2-year Treasury

    slipped 9 basis points to 3.001%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury

    retreated 8 basis points to 2.914%.

  • The yield on the 30-year Treasury

    fell 6 basis points to 3.117%.

What’s driving markets

Risk off sentiment across markets, amid worries about a slowing global economy, encouraged investors to seek the perceived haven of U.S. Treasuries, pushing yields sharply lower.

The 10-year to 2-year spread of minus 8.7 basis points means the yield curve is at its most inverted since the spring of 2007, signalling an increased likelihood of an economic downturn.

The mood was also cautious because of U.S. inflation data due on Wedneday, a report which will impact the pace of Federal Reserve interest rate rises.

“The U.S. 10-year yield dropped back below 3% after rallying above following Friday’s stronger than expected jobs report,” said the strategy team at Saxo Bank. “This despite expectations that Wednesday’s U.S. CPI print may edge closer to 9%, thereby supporting the Federal Reserve’s case for another jumbo rate hike at the July 27 meeting.”

Markets are pricing in a 91% probability that the Fed will raise interest rates by another 75 basis points to a range of 2.25% to 2.5% after its meeting on July 27. The central bank is expected to take its borrowing costs to 3.5% by April 2023, according to Fed Funds futures.

“Broad concerns on growth risk across developed markets and increased probability of U.S. recession have driven a sharp repricing of monetary policy expectations…with markets now questioning the speed and the length of the tightening cycle. Market depth remains poor with historical volatility close to record high,” said JPMorgan global rates strategists.

The MOVE index, a measure of anticipated Treasury market volatility, was trading at 148, up 76% year to date.

In Europe, similar dynamics were at play. The yield on 10-year German bunds

fell 13 basis points to 1.116% after the ZEW survey of business confidence plunged to minus 53.8 compared to forecasts for minus 38.3. Sentiment in the country has been hit by fears Russia will continue to restrict energy supplies.

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