Spread Between Bonds and the Fed Policy is at the Highest Levels Since 1994

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  1. (3) 3
    The Oracle says:

    The FED moves over months and years. The market for treasuries moves almost immediately anticipating FED policy and reacting to economic and inflation data. But let\’s be clear, it\’s FED policy leading the markets, not the other way around. Disclaimer, things can change and change quickly. I\’m open to all possibilities. That said. What we know to be highly probable at this moment in time, based on recent FED statements, is that the FED is expected to raise rates in June and July .5 points each time. We also know based on a number of statements that the FED at this moment intends to get to neutral or a little above by year end which some have stated is 2.5% FED funds rate. Certainly a significant economic slowdown and/or rapidly declining inflation could change things. But right now neither of those is highly probable although of course certainly possible. Without those things changing, I\’m guessing at a FED funds rate about 2.75% by year end, which incorporates 2.5% target and factors in the potential the FED will want to do more in 2023. I don\’t see the 2 year rate rolling over significantly, and I think it\’s more likely it is range bound between 2.5% and 2.75% in the near term. Currently at 2.65%. Unless you see significant changes in the economy (we are seeing a slowing but not yet a crash) or rapidly declining inflation, stock projections should probably be based on that type of 2 year range. Makes sense? And I don\’t personally see that as either bullish or bearish, which means the market will move on earnings and PE.

  2. (3) 3
    matsegubben says:

    I think adding CPI to the analysis would be beneficial. The environment in 1994 was a declining CPI YoY which fueled the rally as consumers were feeling richer with more cash at hand. The opposite is true now. Hence I am not so sure any more SPX rally will last. CPI YoY acceleration has eroded many wallets and the 90% low income earners are strapped for cash. I am shorting consumer discretionary and retail. I think that is a safer bet than putting a lot of cash into a SPY rally that I believe would be a massive head fake to lure the dumb money in a final time before the crash of the century.

  3. (0) 0
    Fahad says:

    I agree with MATSEGUBBEN, but suckers rally has to be quite a strong one to create a FOMO. At this point I know of many retail investors who have pulled out of markets, even positioning defensive on their 401K. Either market will have to print a very low reading, maybe under 3500 for defensive investors / retailers to re-invest on value / risk-reward proposition and continue moving down from there or market has to rally above 4700 to create a FOMO before crashing