Stocks May Suffer if 2-Year Price Breaks Out – | Jewelry Dukan

  • 2-year government bonds surged over 4% after FOMC meeting
  • The 2-year note could now be heading for around 4.5%
  • This should lead to a lot of stock market volatility

The Treasury rate surged above 4% after the FOMC meeting on Sept. 21 and that may not be over for a long time. The FOMC meeting revealed many details and set a possible path for monetary policy for the remainder of 2022 and 2023. The rate was more hawkish than expected, paving the way for a 2-year rate that could soon break the 4.5% mark.

The price is now just catching up to the December 2023 Fed Funds Futures contract. It has been trading almost in step with the December contract since early August, trading about 20 basis points lower.

2-year return vs. December contract

If the market believes that the FOMC summary of economic forecasts and interest rates are headed for 4.6% of the federal funds rate, December contracts need to rise to that 4.6% level over time. Based on this current spread between the 2-year and December contracts, the rate should also be approaching 4.4% to 4.5%.

Technical breakout

The technical chart also suggests that the 2-year note could rally even higher by 4.15% from its current levels. There is only one technical resistance level, around 4.25%, and no natural resistance until the 2-year price reaches around 4.65%. This wide range of resistance is due to how quickly interest rates fell in 2007 as the market began to price in the rising risk of a recession.

2 year return

Rising volatility

Rising interest rates at the front end of the curve will be overall negative for equities as credit spreads widen. A ratio of the iShares 1-3 Year Treasury Bond ETF (NASDAQ:) and the iShares iBoxx High Yield Corp Bond ETF (NYSE:) mimics the Markit CDX high yield spread. Comparing the ratio shows that when these high yield spreads widen, the VIX rises, suggesting that stock market volatility is increasing.

SHY, HYG Daily

Of course, higher volatility isn’t good for stocks in general or higher-beta names. Unfortunately, these may be names that have already suffered badly, like many of the pandemic names that many investors have fallen in love with.

Many of these stocks are already heavily down, even if their valuations make more sense today than they did about a year ago. If the market sees a spike in volatility in the short term, these stocks won’t be immune.

Over the next few weeks, it seems likely that the 2-year rate could go much higher. As these rates continue to rise, it is highly likely that they will spill over into stocks in the form of increased volatility and lower prices.

Disclaimer: Charts used with permission from Bloomberg Finance LP. This report contains independent comments used for informational and educational purposes only. Michael Kramer is a member and investment advisor representative at Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of directors of any affiliated company that issued these shares. All opinions and analysis presented by Michael Kramer in this analysis or market report are solely the views of Michael Kramer. Readers should not consider any opinion, viewpoint or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell any particular security or to adopt any particular strategy. Michael Kramer’s research is based on information and independent research believed to be reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy and should not be relied upon. Michael Kramer is not obliged to update or correct the information contained in his analyses. Mr. Kramer’s statements, policies and opinions are subject to change without notice. Past performance is not a guide to future results. Neither Michael Kramer nor Mott Capital Management guarantees any particular result or profit. You should be aware of the actual risk of loss when following any strategy or investment commentary presented in this analysis. The strategies or investments discussed may fluctuate in price or value. The investments or strategies mentioned in this analysis may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as advice appropriate to you. You must make an independent investment or strategy decision in this analysis. Upon request, the consultant will provide a list of all recommendations from the last twelve months. Before acting on the information contained in this Analysis, you should consider whether it is appropriate for your circumstances and you should definitely consider seeking advice from your own financial or investment adviser in determining the suitability of any investment.

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