Markets are no doubt cheering the selection of macro investor Scott Bessent as Trump's new Treasury Secretary. Stocks are popping globally, and even more significantly, the ten-year U.S. Treasury yield has eased to just over 4.3%.
The hope is that Bessent, by spurring growth through his "3-3-3" plan, will help lower the deficit, reduce Treasury issuance needs, and put U.S. finances on sounder footing. Which is all well and good. But there is a delicious twist to the market moves this morning that I think Bessent in particular would appreciate.
The yield curve...wait for it...just re-inverted.
Yes, the same yield curve (I'm talking the 2-year Treasury yield minus the 10-year yield) that first inverted in 2022, was a precursor to the stock market's collapse later that year, and was supposed to be a clear sign that recession was coming. It never arrived, though, for reasons which may include massive fiscal stimulus, the AI boom, and immigration.
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Anyhow, one of the best signs to investors this year was the fact that in August, in anticipation of the Fed's coming rate cuts, the curve finally de-inverted, or un-inverted, or whatever you want to call it.
We have a running joke with Paul McCulley about this, who quite rightly keeps emphasizing on our show the importance of the curve turning positive again, which spurs banks to make money doing more lending, thereby stimulating the broader economy. It's why McCulley is such a proponent of more Fed rate cuts, which help lower shorter-term yields and make it easier for the curve to stay positive. The KRE regional bank ETF, for instance, is up nearly 30% since the curve turned positive in early August.
And now--poof!--we inverted again. The 10-year yield dropped much more than the 2-year did this morning, resulting in a brief inversion of -1.6 basis points.
Money Report
Now, to be fair, we also had a very brief and slight inversion about six weeks ago. It was a blink-and-you-missed it kind of affair. And perhaps this will be the same. But the conditions necessary to get the curve firmly back in positive territory would be (a) much lower short-term rates, and (b) strong growth expectations boosting long-term ones.
In order to achieve both of those at the same time, inflation needs to go away. It's because of sticky inflation that markets are only 50-50 on whether the Fed will even cut again in December at this point, which is why the 2-year yield has risen from 3.5% in September to 4.3% today.
This is the landscape that Bessent is walking into. For all the positivity that investors anticipate, there is a real warning from the yield curve included in these market moves this morning. The quicker the curve un-inverts, and the quicker inflation ebbs, the easier his task will be, and the better markets will ultimately do.
See you at 1 p.m!
Kelly
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