Credit Markets are Starting to Send Warning Signs

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The masses are glued to the latest headlines from President Instability and the insanity that the markets have been through the last 48 hours. Headlines like this one are moving markets versus economic reality:

Boys and girls, it’s one thing if we’re experiencing 15-20 bps moves in US Treasury yields over a month long period. But now it is almost daily and that should be of some concern.

For example, market expectations have soared for more rate cuts due to the Atlanta Fed’s Nowcast (key word) of a negative print on GDP(from ForexLive):

Three Federal Reserve rate cuts are now fully priced- in for this year

Insanity is now reigning supreme over markets and yet people are still trying to figure out ways to get Fartcoin into the nationals cryptocurrency reserve.

The larger issue this author sees it was is happening with the sovereign credit markets and the instability being introduced with wild policy swings. For example, if anyone thinks that bond market volatility is shrinking, they have not been paying attention.

Eventually, probably sooner rather than later, the two will track as they have historically since the Covid era turbulence. Equity markets as well as credit markets are ill prepared for massive volatility in sovereign credit.

Thus the question that is outstanding heading into this period of greater trade and tariff instability is that will the 2 year yield re-assume it’s leadership as the direction for SOFR (Fed Funds Rate) or will the Fed Funds Rate lead the way?

This author believes that foreign influence and the distrust of the current economic situation will result in the two year taking the leading role higher as embedded inflation returns with a vengeance in the second and third quarters of this year. This will actually put the Fed behind the curve and result in paralysis by analysis leaving the market and US economy trapped in its stagflationary state that it finds itself in now.

Watch the credit markets, ignore the noise and understand that the smart money, every single time, is always correct in the end.