Wednesday's Market Minute: Free Lunch, Courtesy Of The Yield Curve

One way to view markets is that they are one giant feedback loop. A reflexive echo chamber, per the description of legendary investor George Soros. And, boy, is today's echo loud.

While the Treasury market yield curve has been flattening for months, the final straw for economists landed this morning as the difference between the 2-year and 10-year yield went negative. This has happened before every recession. Now, the question is what Jay Powell does about it. One side says it's a mistake if he doesn't make the necessary interest-rate cuts to try and prevent recession. The other says he shouldn’t take the bond market signal so literally, because if it’s wrong then the Fed risks pumping up bubbles and inflation. The expectation right now is that Powell will do the former because the wisdom of the now-extremely big crowd in the bond market is telling him to.

So, rising risk of recession, and the assumption the Fed will be the biggest domino to fall among central banks that can only take rates in one direction means… bonds can only go up! Right? In some ways, traditional market logic is breaking. With conviction so high that rates will only go lower and the global hunt for yield will march on, the echo chamber is now screaming: “Come get your free lunch!” Bond market history suggests the free lunch may be for real and the Fed experts tell you Powell will bring a picnic blanket, but if there’s one thing with as good a track record as the yield curve, it’s that lunch ain’t free on Wall Street.

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