The Federal Open Market Committee raised interest rates 25 basis points this week to an upper limit of 5.0%. They forecast one additional hike this year and no cuts. On the contrary, the bond market is pricing in 2-3 cuts by year end in what some are saying is the largest gap between Fed forecasts and market forecasts since the “dot-plot” was created in 2012.
This month, bond market volatility, as measured by the MOVE Index, surpassed the Asian financial crisis of 1998 and the COVID crisis of 2020. Only the Global Financial Crisis saw a slightly higher reading on bond market volatility. The other key theme in the fixed income space is the steepening of the yield curves.
This is normally the timeliest aspect of yield curve inversions. Once the curves steepen it is often a sign that the recession is close at hand. In just over two weeks the spread between the 5-year and 30-year Treasury went from being inverted by 45 basis points to being positively sloped by 20 basis points. It is the largest increase over this time span since 2001.