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亚马逊云账号(www.2km.me)_Powell pivot crushes yield curve, deepens bond market conundrum

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The clearest bond market consequence of Fed Chair Jerome Powell's (pic) sudden change of tune on inflation has been to compress the gap between short- and longer-dated rates, right across the maturity spectrum.

ORLANDO, Fla. : To echo Bob Dylan, the flattening U.S. yield curve shows the bond market knows something is happening, but doesn't quite know what it is.

The clearest bond market consequence of Fed Chair Jerome Powell's sudden change of tune on inflation has been to compress the gap between short- and longer-dated rates, right across the maturity spectrum.

The traditional red flags this raises - looming economic slowdown, interest rates being raised too much or too quickly, deflationary pressures - are well known. But do they still apply in today's utterly unique economic, policy, and public health environment?

The running narrative, fueled by Powell, holds that inflation risks staying higher for longer unless the Fed acts. The overwhelming consensus among bank strategists is to sell Treasuries, pushing the 10-year yield up toward 2%.

But that's not what the bond market is telling us.

To be sure, recession does not appear to be an immediate risk. The spread between two- and 10-year yields remains more than 85 basis points off inverting, the classic pre-cursor to a contraction in economic activity.

But still, this closely watched part of the curve is the flattest this year. More pronounced flattening at the long end of the curve, kinks now emerging at the ultra-short end and rising bond market volatility offer more reasons for caution.

Some of the moves this week bear spotlighting.

The 2s/5s curve is 13 basis points flatter this week, on course for its biggest weekly flattening in over six years; the 10s/30s spread is down to 31 basis points, the lowest in nearly three years; and the 20s/30s curve is showing a record inversion of 8 basis points.

This reflects a flattening trend that has been underway in the bond market for months. But as Jeff Snider, head of global research at Alhambra Investment Partners, points out, this has now been followed by a rare inversion in the Eurodollar rates curve.

Implied yields from Eurodollar futures contracts over the late 2024 - early 2026 horizon inverted slightly on Wednesday, the first inversion of the three-four year part of the curve since 2018. Like 2018, it suggests the Fed should be wary of raising rates.

Snider argues that the balance of risks is tilting "very clearly" toward deflation. Treasury market flows and positions amounting to bets worth trillions of dollars prove this.

"We don't know exactly what will happen or when, but the progression is clear. We have moved much closer to whatever it is," said Snider.

LONG, LONG, LONG

Even without Powell's "pivot" that inflation should no longer be described as "transitory," the current environment was already challenging enough for investors and policymakers.

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