The dramatic flattening of the Treasury yield curve during the past two months should send a warning sign to Federal Reserve (Fed) policymakers that a change is needed in their approach to fighting inflation. Yields on 3-month Treasury bills have risen more than 150 basis points (bps) during that time period, while 10-year Treasury yields barely budged — hovering near 3%.
If the Fed continues down the path of super-sized rate hikes while sticking with its current plan for balance sheet reduction, the entire yield curve will likely be pushed into inversion — increasing the odds of a recession. After another round of disappointing inflation readings, an additional 75-basis-point rate hike is a near-certainty at next week’s Fed meeting. However, the Fed is likely to at least consider a greater emphasis on asset sales to tighten policy moving ahead.
This week’s economic calendar is a relatively light one, highlighted by housing data on Tuesday and Wednesday, followed by Thursday’s Philadelphia Fed Business Outlook. Decisions on Thursday by the European Central Bank and Bank of Japan will also be in focus for investors, as high inflation is a mounting problem across the globe.
< Go to Monday Morning Perspectives
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.