Chart Of The Day: Will The Nasdaq 100 Continue To 10,000?

 | Aug 08, 2022 20:27

US futures and European stocks were in the green, as positive earnings and a dovish interpretation of Federal Reserve rhetoric reassured investors.

Moreover, easing yields buttressed the argument of a pivoting Fed. Presumably, if investors expected continuously higher rates, they'd sell Treasuries, pushing yields higher, as they await higher-yielding Treasuries.

However, in my opinion, while it may be textbook behavior for yields to point the way forward for rates, I think investors forget something. The yield curve is inverted!

So what, you ask?

Well, let's break it down. Why is the yield curve inverted?

Because investors have been buying longer-dated bonds than shorter-dated bonds, although the longer commitments provided a lower yield. In a typical market environment, that doesn't make sense. They are only willing to commit for longer for a lower yield. If they buy a shorter-dated Treasury now, there is no telling what the market environment will be at maturity, and traders' cash will be exposed.

In other words, investors are not buying bonds for their yields but for safety. If that's the case, increasing Treasury demand, which pushes the yield lower, does not suggest an expectation for lower rates. Furthermore, I expect 10-year yields to fall lower yet, maybe even against a rising 2-year yield, steepening the inverted yield curve.