SHY: Record Yield Curve Inversion Suggests Interest Rates Are Peaking

Harrison Schwartz profile picture
Harrison Schwartz
13.43K Followers

Summary

  • The bond market faced record losses as inflation spurred a rapid rise in short and long-term interest rates.
  • The US yield curve is facing immense inversion as business activity slows, suggesting a likely recessionary market dynamic in 2023.
  • A closer look at Treasury bond yields suggests the Fed funds rate should peak at 4.5% with hikes ending by six months from now.
  • The short-term Treasury bond ETF SHY has low downside risk given the interest rate outlook and may rise under a recessionary shift if inflation falters.
  • The potential for OPEC+ cuts in response to a recession creates some risk to SHY as inflation could persist even under a downturn - as seen in the early 1980s.

Fed Chair Jerome Powell Holds News Conference Following Federal Open Market Committee Meeting

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2022 was the most volatile year for the bond market in decades, with long-term bonds experiencing record losses. The chief cause of the bond market's losses is the sharp rise in inflation coming out of

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Data by YCharts

Chart
Data by YCharts

This article was written by

Harrison Schwartz profile picture
13.43K Followers
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Disclosure: I/we have a beneficial long position in the shares of STIP,SHY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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