August 4, 2023
We’ve recently intensified our focus on a 60-day tactical window based on a growing expectation for the Fed to end its hiking cycle. There have been 12 Fed hiking cycles since 1966, and all 12 have resulted in bullish yield curve steepening. There are two likely events in the 60-day window where the Fed could make the announcement. The first is the Jackson Hole summit held between August 24-26, and the second is the September FOMC meeting on 9/20. Bullish curve steepening means lower bond yields with shorter dated yields falling faster than those with longer duration. Ten-year Treasury yields approached the October cycle high of ~4.20% this week with CTA short positioning exposed and fading pressures from FDIC liquidations of failed regional bank assets. Of course, near-term macro fundamentals also need to cooperate, and today’s Jobs Report is a small step in the right direction. That combination of factors has us currently bullish on bond duration. The end of a hiking cycle should also be bullish for equities, although the track record there is more mixed with 7 of the last 12 hiking cycles ending in a recession. Not all recessions are preceded by a bear market with markets often looking through those perceived to be short and shallow.