Cathie Wood says bond market signalling Fed making ‘serious mistake’

“The bond market seems to be signaling that the Fed is making a serious mistake. At -80 basis points (as measured by the 10 year vs 2 year Treasury yields), the yield curve is more inverted now than at any time since the early ‘80s when double-digit inflation was entrenched,” she said in a tweet. 

US Treasuries climbed and Asian stocks edged lower today, amid worrisome signals from the bond market. Recession fears were palpable in the bond market, where demand for longer-dated bonds drove a yield inversion to a four-decade extreme this week — sending 10-year rates below those on two-year notes by the most since the early 1980s. Thirty-year bond yields traded under 3.5%, the lowest since September.

Fed Chair Jerome Powell has warned the fight against inflation is far from over, but late last month he said the Fed could ease the pace of its rate hikes as soon as December. Powell’s comments have led the market to price in a lower peak interest rate, which Fed funds futures showed on Wednesday to be 4.918% next May, down from recent highs above 5.1%. Futures show the terminal rate at 4.419% in December 2023.

“Typically, an inverted yield curve is pointing to a recession and/or lower than expected inflation than expected. Surprisingly, the S&P energy sector (XLE) price is not far from an all-time high even though the oil price has dropped from $130 per barrel to $74. Meanwhile, many pure play, early stage innovation stocks have dropped below their coronavirus lows. Truth will win out,” the fund manager said in another tweet. 

In a string of messages posted on Twitter last month, Wood said the current economy echoes 1920, when World War I and the Spanish flu — and the associated supply chain snarls — pushed inflation above 20%, only to have it drop dramatically the following year. The Federal Reserve, which lowered interest rates at the time, helped usher in the era known as the Roaring Twenties, or a decade of economic growth.

A decade later, amid warnings of over speculation in the stock market, the Fed increased interest rates. The Great Crash was then followed by the Great Depression.

Wood urged the Fed to pivot from its current rate-hike cycle, saying the economy is showing signs of reducing inflationary pressures. “We would not be surprised to see broad-based inflation turn negative in 2023,” she said.

If the Fed doesn’t pivot, “the set-up will be more like 1929,” she said.