Yields Up on Fed and Economic Concerns

Yields soar in risk-off session. Treasury yields continued their recent surge today, with the 2-year yield rising ~11bps to 4.73%, a steep climb from January’s end of month level of 4.20%. Markets continue to fear that a Fed pivot is nowhere in sight, which has paved the way for a significant equity selloff alongside the runup in rates. During today’s trading session, over 90% of shares in the S&P 500 (-2.00%) fell, and the tech-heavy NASDAQ declined 2.50%. Futures still suggest that there will be three consecutive 25bp hikes at the March, May, and June FOMC meetings.

Economic worries top-of mind. US consumer strength has persisted, with strong labor markets and continued consumption, but a shift to service spending and less purchases of nonessential products has prompted early concern. Today’s earnings releases from Walmart Inc. and Home Depot Inc. communicated caution about the road ahead, warning that demand could moderate in 2023. Walmart CFO John Rainey said, “There’s a lot of uncertainty with the macro backdrop”, and he went on to highlight auto loan delinquencies and lower savings rates as key factors casting a shade on 2H23. In addition, given the continued economic strength despite higher rates, analysts note that the Fed could choose to hike even more aggressively which could catalyze an economic downturn. Recent activity in corporate-bond markets echoed those concerns. Following a period of tightening credit spreads on shorter duration bonds, which implies a concern about rate hikes, the past week saw the biggest widening amongst junk and BBB-rated bonds, which more strongly signals concerns about the state of the economy. 

Day ahead. FOMC minutes at 2 PM ET will highlight the session, which will be followed by comments from New York Fed President John Williams. Mortgage rate and application data will kickstart the day at 7 AM.