Yield Check — Investors (you might be surprised) like to make money. In fact, most like to make a whole lot of it, but that’s pretty tough to do when yields are literally at rock bottom levels.
But for fixed income investors, a savior might just be on the way and his name is Rate Hikes. Even now, before hikes are actually implemented, the effects can be seen.
The most notable of these effects sound really boring, but stick with me for a sec. The spread between the 2-year and the 10-year treasury yields turns out to be a damn good predictor of economic fortunes to come.
Known casually as the 2- and 10-year spread, 2- and 10-year premium, or pretty much anything along those lines, this metric measures the difference between the 10-year treasury yield and the 2-year treasury yield.
Intuitively, the yield on a 10-year note should be higher than that of a 2-year as holding an asset for 10 years implies a lot more risk than holding it for 2 years. But every once in a blue moon, the 2-year yield manages to spike over the 10-year, and that’s not a good sign.
This is known as a yield curve inversion and it’s really good at predicting recessions. Typically, when the 2-year yield rises above that of the 10-year, investors have learned to expect that a contraction is more likely within the next 18 months.
While we’re chilling right now, the spread between these two all-important assets is at the closest level since October 2020. We can thank JPow and the forthcoming rate hikes for that.
See, the process of policy tightening, although well-advertised, adds major uncertainty into financial markets as no one knows how everyone else is going to react, often leading to a rotation out of short-term fixed-income assets.
As of right now, the market is pricing in 32 bps (basis points) of rate hikes at the end of March, suggesting most traders see a 25 bps jump while a minority of traders are eyeing a 50bp jump.
The higher investors expect the rates to rise, the closer we’ll get to a yield curve inversion, which historically means we’re more likely to see a recession sooner than later, and it just might mean the end of humani— okay fine, I’ll calm down.
Just watch out, apes.
Shut Up and Pay Me — U.S. workers are rolling in it right now, at least, if you ignore inflation. Compensation for members of the U.S. labor force rose at the fastest clip since the turn of the century in the fourth quarter, but despite those gains, wage boosts couldn’t catch inflation.
Last quarter, U.S. worker comp rose 4% from a year earlier. Meanwhile, the Core PCE measure of inflation, the Fed’s preferred inflation gauge, rose 4.9% from the final quarter of 2020. So yeah, your paycheck might look fatter, but your shopping bags definitely aren’t.
Despite every single small business you’ve been to recently displaying “Now Hiring” signs, workers still couldn’t get their pay above the rate of inflation. The bright spot, however, comes when you parse the data a bit.
The majority of wage gains came to those in the lowest income earning segments, meaning earners in this classification did outpace the jaws of inflation. The higher you go on the income-earning scale, the lower their growth was in 2021, for the most part.
At this point, we can’t even be sure if wages are rising because of inflation or some other force in the labor market like tight supply and hella demand. Long story short, inflation is a b*tch.
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