Morning Notes — Real Yields

The challenge for any central bank is that inflation and employment adjust with a ~12 month lag.  A lot of time has been spent on recession signaling from the recent 2/10 yield curve inversion.  A yield curve inversion has greater statistical significance with a recession the longer the inversion lasts.  The monthly close of the 2/10 nominal curve has a near-perfect record when predicting recessions, but that hasn’t happened yet.  The recent nominal curve inversion is also less reliable due to QE distortions and technical factors.  The Fed and many bond strategists agree these distortions make the shape at the short-end (current 3mo rate/3mo rate 18 months forward) more reliable.  To keep things simple, if a recession was coming, High Yield bond spreads would be much wider than present levels of ~389bps.    

NDX: The NASDAQ 100 is underperforming again today as 10-year real yields (-0.18) and 10-year nominal yields (2.65%) begin to converge.  We expect more near-term pressure on Tech based on an unsustainable record spread between real and nominal yields.  In our opinion, real yields have been suppressed by higher breakeven yields following a surge of retail investor flows into a thin/illiquid TIPS market following the Russian invasion. Ten-year TIPS breakeven yields have declined following Brainard comments/FOMC minutes and are approaching key technical support at ~2.80.  A sustained breakdown through that level would confirm a technical top and increase our conviction for higher real yields in the months ahead.