The bond market is pricing some sort of recession at this point, while the equity market is still in denial, according to Morgan Stanley Chief U.S. Equity Strategist and CIO Mike Wilson.
It is highly predictable that a recession will be coming within a few months if the yield curve goes negative. It is a long time. 12 months is a long time. The yield curve re-steepens when the real problem starts. Wilson told Bloomberg TV that the Fed s going to have to be cutting here at some point because that is essentially the bond market saying the Fed is going to have to be cutting here at some point.
Price Action: Yield on two-year treasury notes fell from 5% in early March to as low as 3.8% last week as the bank shuttered of the Silicon Valley Bank made investors rush into the safety of short-term treasuries. The yield on the notes has gone back to 3.96% at the time of writing.
The yield curve has been steepened by 60 bps in a matter of days, a phenomenon seen only a few times in history, and usually the bond market's way of saying recession risk is now more elevated, Morgan Stanley analysts led by Wilson wrote in a note.
Markets witnessed a number of fluctuations over the last two weeks following the unfolding of the crisis, which many feared would end up in contagion. After UBS Group AG's rescue deal with Credit Suisse Group AG CS, as well as coordinated action by central banks around the world to boost liquidity, major Wall Street indices saw a bit of relief.
The SPDR S&P 500 ETF Trust SPY closed 0.96% higher and the Invesco QQQ Trust Series 1 QQQ gained 0.35%. The Vanguard Total Bond Market Index Fund ETF BND closed 0.43% lower.
Market participants are looking forward to the Federal Reserve'sFederal Reserve's two-day policy meeting on Tuesday. The CME FedWatch Tool shows a 73% probability of a 25 bps rate hike during this policy compared to the 26% chance of status quo.
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