The bond market doubled down on scary warnings Monday, signaling both a possible recession is looming and that the Fed could have to cut interest rates this year to stop it.
The disconnect between stocks and bonds was fairly dramatic Monday, after the bond market flashed a recession warning Friday. The Dow traded as much as 100 points on both sides of unchanged Monday, but the bond market reflected a flight to safety trade, with yields falling across the curve from the shortest duration securities to the longest.
At the same time, there was plenty of action in fed funds futures, where traders were betting on at least one 25 basis point cut from the Federal Reserve this year and more than two by next year. That's a big change from late last year, when the market was still expecting interest rate hikes and the Fed was forecasting three.
On Friday, markets were spooked when the yield curve inverted, a reliable recession signal though usually not an immediate one. That means the rate on a lower duration instrument rose above a longer duration security's yield. In this case, it was the yield on the 3-month bill, at 2.44 percent Monday, moving above the 10-year yield, which sank as low as 2.38 percent, a more than 2-year low.
In another sign of angst, traders were also watching the 10-year yield Monday as it slid below 2.40 percent, about where the fed funds rate is. The 2-year, at 2.24 percent, was well below that level.
Strategists said the curve inversion does not necessarily mean a recession is coming but it could.
