Halyard’s Weekly Wrap – 04/01/22

The brutal bear market in bonds continued this week, with the two-year note 108 basis points higher than where it stood on March 1^st.  Following a solid non-farm payroll report, two’s are 9 basis points higher for the first day of April.  As a result, the 2-year/30-year yield curve is now marginally inverted, which is likely to provoke recession fears.  Historically an inverted yield curve signals a recession ahead.  We think the selling is getting overdone, but are reluctant to extend duration until we see some stability in the market.

Non-farm payrolls showed that the economy added 426,000 jobs in March, slightly below consensus expectation of 490,000, but the two-month net revision added 95,000 new jobs to the tally, which continue to portray the economy as robust.  Equally encouraging, average hourly earnings rose 5.6% compared to March of last year.  That’s certainly more than enough support for the Federal Reserve to raise the Fed Funds rate 50 basis points in May.  In fact we would argue that it’s enough for them to raise rates 50 basis points today, but we risk “beating a dead horse” with that view.

We continue to see evidence that there is too much liquidity in the system as witnessed in the Treasury Bill market and the reverse repo market.  If this were not the case, T-bills would be trading at or above the 0.32% at which Fed Funds trades.  Instead, the nearby bills are offered at 0.14%, well below Fed Funds.  As for reverse repo, the mechanism the Fed employs to soak up excess liquidity, $1.8 trillion was the total outstanding as the first quarter came to a close.  That tells us that we’re not the only ones reluctant to extend duration into a rising interest rate environment.  Consider, the 2-year/30-year yield curve is -1 basis point while the one-week/2-year yield curve is 230 basis points.  That’s a clear indication that the Fed is far behind in their mission to normalize interest rates.