On October 1st hosted by Taylor Riggs on Fox Business, Darius discussed why rising Treasury yields may force greater coordination between the Fed and Treasury, and potentially produce a “Fed-Treasury Accord 2.0.”
Here are three takeaways:
1) The U.S. Economy Remains in a Booming Growth Phase
Nominal GDP grew 8.2% quarter over quarter on a seasonally adjusted annualized basis and 6.3% year over year, roughly twice the growth rates recorded before COVID. Real consumer spending also remained above trend, supported partly by asset-price appreciation among higher-income households.
Key Takeaway: The U.S. economy remains supported by above-trend consumption and a powerful capital-deepening cycle, while underlying inflation pressures are beginning to ease.
2) What Do Widening Credit Spreads Signal for Asset Prices?
42 Macro’s Volatility-Adjusted Momentum Signal has identified widening spreads across investment-grade, high-yield, and CCC-rated credit. According to Darius, weakness across the credit spectrum indicates liquidity and funding pressures that could weigh on asset prices in the near term.
Key Takeaway: Deteriorating liquidity could produce additional near-term downside, but it may also accelerate the policy response supporting the next phase of the bull market.
3) The Fed Must Tighten Cyclically to Ease Structurally
Approximately 94% of the rise in Treasury yields since their February low has come from real rates. With the market pricing R-star and the neutral rate more than 100 basis points higher, 42 Macro believes the Fed must tighten monetary policy to arrest the increase in bond yields.
Key Takeaway: Once credibility is restored and yields stabilize, policymakers may have greater scope to provide the liquidity Darius expects in 2027 and 2028.
Strong growth, cooling inflation, and deteriorating liquidity are sending investors conflicting signals. To make sense of those signals, 42 Macro investors use a systematic process to track changes in underlying data to determine when conditions warrant a shift in positioning.
Explore 42 Macro research solutions to manage near-term risk without losing sight of the longer-term opportunity.
— Team 42
