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Wednesday, December 7, 2022

 

MANAGING DIRECTOR:
Scott Carrithers
 
PORTFOLIO SALES AND SERVICE:
George Morris • Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino
Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris Brian Schaff
Josh Kiefer • Robert Schuyler • Tom Toburen • Aaron Hemphill • Jeff Macy • Todd Czinege

US Treasury Market

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
11/30/22 4.07 4.37 4.70 4.74 4.38 4.13 3.82 3.76 3.68 4.00 3.80
12/01/22 4.04 4.33 4.65 4.66 4.25 3.98 3.68 3.62 3.53 3.85 3.64
12/02/22 3.91 4.34 4.65 4.69 4.28 3.99 3.67 3.61 3.51 3.79 3.56
12/05/22 3.93 4.36 4.73 4.77 4.41 4.13 3.80 3.72 3.60 3.84 3.62
12/06/22 3.87 4.37 4.74 4.73 4.34 4.07 3.73 3.64 3.51 3.77 3.52

Source: U.S. Department of the Treasury, as of 12/06/22   



The Yield Curve is Speaking… Are You Listening?
 
Although not in a literal sense, the treasury yield curve does talk to us via its ever changing shape, steepness and structure, and provides us with a glimpse of what’s to come. There’s an expression in financial circles that says “don’t fight the Fed.” Well that may be true, but history teaches us that the bond market (think yield curve) is usually way ahead of the Fed in predicting future rates. So today let’s listen to what the yield curve is telling us is on the horizon.

Much has been made of the relationship between the 2 year and 10 year treasury yields and the recessionary signal it sends when these two yields invert. We have currently had a sustained inversion in the curve since July of this year. In fact, the 2 to 10 curve is now the steepest inversion seen in over 30 years, as show in the graph below.
 
As shown above, the curve is currently 34 basis points more inverted (-81 vs -47) than back on March 31, 2000. So what is this inverted curve telling us? Let’s listen further by examining the curves on these two dates shown in another graph below.

 
What is obvious by looking at the two yield curves is the incredible similarities even though separated by over 22 years in time. In fact, it’s just a parallel shift downward in yields to the tune of around 200-250 basis points. The real story this graph is telling us is evident in this next graph below. 
 
As you can see, the shape of the curve from March 31, 2000 looks dramatically different on June 30, 2001… Just 15 months later. The yields on treasury maturities in the 1 to 5 year range had fallen between 260 and 135 basis points. 

The bond climate in early 2000 felt very much as it does today. Yields were relatively high in the cycle, bond losses were magnified in investment portfolios, liquidity was scarce and any available funds were being channeled into loans. Sound familiar?

Early 2000, in retrospect, turned out to be an opportune time to be adding securities to bond portfolios. The yield curve in June 2001 proves this to be the case. The yield curve in December 2022 is also talking to us. Are you listening?


This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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