Wild week. And it is not over.

Two things I am watching.

Source: Fred

Source: CEFConnect.com

Wow. Stunning collapse in short duration yields.

Source: Marketwatch.com

Over 100 bps on the two year.

And what is even more interesting to me is the gap between the current Fed Funds target rate and these rates:

Source: Bloomberg.com

Seems like that is going to need to resolve itself somehow, at some point.

Despite the Fed raising interest rates, credit conditions were actually relaxing on some levels in the back half of 2022.

“Financial conditions have loosened significantly in recent months and, by some measures, are around levels that prevailed last March when the Fed initiated this hiking cycle.” – Why the Federal Reserve Should Raise Rates by Half a Percent

Equities were rallying through this period, unsurprisingly.  So, were digital bit apes and other assorted things.

However, there appears to be evidence that credit conditions are now heading the other way:

1. “The Federal Reserve has reduced its balance sheet by $626 billion since the peak in April 2022, with total assets now down to $8.34 trillion, the lowest since August 2021, according to the weekly balance sheet released today. Compared to a month ago, total assets dropped by $94 billion.” “Over the past four weeks, the Fed has shed $61.2 billion in Treasury securities, exceeding by a smidgen the monthly cap of $60 billion.” – Fed’s Balance Sheet Drops by $626 Billion from Peak
2. “The only time conditions have tightened this much has been in advance of or during the last 4 recessions since 1990.” – Credit conditions in Q4 were recessionary
3. “As it stands, the average lender is now back up into the low 7’s for a well-qualified 30yr fixed scenario. These aren’t the highest levels we’ve seen during this cycle, but they are the highest in more than 4 months (and not too far away from the long-term highs just under 7.4%).” – Calculated Risk: “Mortgage Rates Now Back Above 7%”

We have had a 15 year bull market with low interest rates and lots of liquidity.  In other words, “Disneyland.”

My sense is most market participants are going to be slow to change how they learned to behave during the bull market cycle, until they are forced to do so.  

Yes, that was a bear market rally.

Next question.

I see a chart like this, and the value hunter in me, cannot help but see an opportunity.  This fund is plumbing its all time lows.

But then I look at a chart like this, and think, well maybe all time lows when the history is only from 2010 forward, is irrelevant (maybe even dangerous) given the macro squishing that could happen if large flows / rate trends reverse (i.e. return to more normal levels).

The vast majority of interest rate history is above, not below, where we are today.

Source: Visual Capitalist