The stock market was up modestly after the Federal Reserve ended their meeting last week with another 0.25% interest rate hike, as anticipated. The bond market, however, has been making much bigger moves than the stock market for the past couple of weeks due to regional banking concerns and the potential to lead the Fed to cut rates by the end of the year.
Bond yields have been dropping rapidly as investors race to buy U.S. treasury bonds as an alternative to keeping cash in a bank. The drop in yields is most dramatic in short-duration bonds of 2 years or less and this could lead to a reversal of the long talked about yield curve inversion that began in 2022. A yield curve inversion occurs when short-duration bond yields are higher than long-duration bond yields. This type of inversion is a sign of an imbalanced economy that may be headed for a recession. A reversal of the inverted yield curve could be a sign that the economy is righting itself.
Over the past few weeks, the stock market dropped moderately as banking fears heated up. However, the market is back up to around the same levels as when it began, and I see this as a positive sign that the bank failures have been contained and haven’t led to larger economic problems.
Photograph by: Kenny Eliason on Unsplash
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