We may be closer to a credit event today than we have been at any point during the current cycle. The Fed’s decision to hold interest rates steady wasn’t a surprise, but his hawkish tone and indication that another rate hike may be in store before the end of the year wasn’t what the market was hoping for. U.S. stocks retreated nearly 3% post-meeting, but it’s the bond market that’s sending the real warning signals. The 10-year yield briefly touched 4.5% this week for the first time since 2007 and has now risen nearly 120 basis points just since the beginning of May. These kinds of sharp increases in real rates tend to happen right before something breaks in the bond market. If inflation remains around the 3-4% level over the next 6-12 months, that means we could be looking at a strong Treasury rally coming here very soon.
The Bank of Japan had the potential of turning the markets volatile this week with its own meeting, but it kind of turned into a dud. There were no policy changes and no real indication that anything imminent is about to happen. 10-year JGB yields were little changed and the yen is still hovering around its same level. That doesn’t mean the odds of the BoJ breaking something through policy have gone away. Inflation and growth rates in Japan are both supportive of more restrictive policy and the BoJ won’t be able to keep things ultra-loose for much longer without consequences. At this point, we should probably just consider this a delay of what might be inevitable.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.