Investors keep adjusting their portfolios in anticipation of the new cycle. Perhaps the first adjustment was the equity sector rotation, with some factor rotation embedded. Coincidentally, in fixed income, the adjustment is occurring on the short end of the Treasury curve. The T-bill trade that has been in place where Investors have absorbed everything Janet Yellen was issuing up to 3 months, is extending into the 2 Year bond, as you can see in the chart below. The bet appears to be clear: once the Fed starts cutting, will continue to do so, rapidly. That’s why the spread between Fed funds and the 2 year is the widest it’s been since the Great Financial Crisis. When Fed Funds catch up to the 2 year, perhaps the next move will be on duration side, extending maturities to benefit from lower yields and in the credit space, where Investors have started to differentiate between BB and CCC, but will need to further adjust if we enter a new credit cycle.
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Chart source: Zerohedge
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