The Weekly Beat: 10 April 2022

Interest rates, Global Food Crisis, and Stocks to Watch

If you enjoy reading this piece, please click the Like button at the end as it helps us immensely and exercises your index finger.

·  Action across the yield curve last week was dominated by the release of the March FOMC policy meeting minutes.  The back end of the curve sat up noticeably upon release of the minutes as the market digested confirmation that balance sheet reduction (i.e. Quantitative Tightening) is likely to begin soon (Chart 1). 

·  The curve has effectively been broken into two pieces that, in a highly unusual situation, have been moving in opposite directions recently (Chart 2).  The front of the curve, out to the two-year maturity, is effectively pre-programmed by forward guidance.  The back end of the curve is dominated by balance sheet guidance.  The middle of the curve faces uncertainty and, as a result, is where “Taper Tantrum 2” has been concentrated (Charts 3 & 4).

·  Market commentators have fixated on yield curve inversion and will likely argue endlessly about whether a recession is currently occurring or imminent (Chart 5).  This is a mistake because it overemphasizes the signaling aspect of the indicator rather than the role that yield curve inversion plays in causing recession.  Yield curve inversion disincentivizes leveraged lending and the drying up of credit flows lead to recession.