In March 2022, the USD swap curve became inverted and by the end of August the difference between the 2-year vs 10-year tenors fell to -0.6% (see also Alternative Credit Letter in April), a signal of economic weakness ahead.
In June this year, the Fed funds futures curve also inverted, pointing to a more dovish stance of the Fed by mid-2023. This uncertainty about the future path of interest rates is caused by rising fears of recession and a potentially faster cool-down in inflation as a result of rate hikes. However, this interpretation might prove to be too optimistic as the wage-price spiral could become a more dominant factor. In general, volatility at the short end of the curve was particularly painful for short duration bonds, both in terms of interest rate and credit risk.
Read our Alternative Credit Letter