What’s Next for J.Powell & Treasury Yields After 90bps Curve Inversion?

Fed Chair Jerome Powell is set to make remarks shortly, which should provide Wall Street with some future insight into where markets will end up as they continue to battle against elevated inflation. As a result, U.S. Treasuries will be primed for potential price swings as they attach themselves to the prediction of future rate hikes and cuts.

Does it all matter? Harley Bassman a managing partner at Simplify Asset Management doesn’t believe so. Traders using leverage should be cautious about how much they allocate to Treasuries and bond ETFs ahead of Powell’s remarks, as volatility could increase.

“By intent or accident, the market has bet the ranch that the U.S. economy is going to ‘hard land’ soon, and thus induce the FED to cut rates as early as Labor Day (September); that is simply NOT going to happen,” Bassman said. While goods inflation is calming (used cars, really?), service inflation has not pulled back. Bassman outlined that he does not see the Fed cutting rates until 2024 and not in late 2023 like many predict. Traders should plan for the long-term and not expect rate cuts in the near future.

Bassman added: “The Yield Curve is way too inverted given even optimistic inflation projections relative to the FED’s stated politics and policies.” The inversion of the yield curve has widened even further once again as it touched on Tuesday its widest point since 1981. The spread between the U.S 10 Year Treasury yield (US10Y) and the U.S. 2 Year Treasury yield (US2Y) reached a gap of 93 basis points. Traders should monitor the yield curve and look for opportunities to profit from further inversion or eventual steepening.

As the yield curve inverts, Treasury ETFs and large-scale bond funds come into focus: (NYSEARCA:AGG), (NASDAQ:BND), (NASDAQ:TLT), (NASDAQ:IEI), (IEF), (SHY), (GOVT), (VGSH), (VGIT).

If history is correct, elongated inverted curves are a precursor to a recession as it was seen before the 2008-2009 Great Recession and also before the 2001-2003 market meltdown.

Make sure to stay away from risky buys into stocks and crypto, the least you could do is to keep hedge positions on major indices and EUR/USD sell orders.

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