Bond Market A Warning Sign For Fed's Mistake, Says Analyst: '2-Year Treasury Yield Acting Like Meme Stock'

The U.S. has been sporting an inverted yield curve for some time, with longer maturity bonds yielding less than ones with shorter maturities. This reflects investor expectations for a decline in long-term interest rates, which is typical of recessions.

An analyst recently offered her take on treasury yields and their implication for the fed funds rate.

What Happened: A deeply inverted curve tells that the Federal Reserve is making a mistake, said Emily Roland, co-chief investment strategist at John Hancock Investment in an interview with Bloomberg.

"That’s exactly what is happening here. The bond market is all over the place," she said. She noted that the two-year Treasury yield was above 5% and then below 4%.

"The two-year Treasury yield is acting like a meme stock," Roland said. Meme stocks are those which are given to wild gyrations, given the significant amount of retail interest in them.

The yield on the two-year Treasury note has traded in a 3.550%-5.084% range since the start of March amid the banking crisis and the release of some soft economic data.

The volatility reflected the significant uncertainty around the Fed policy, the analyst said, adding that the lack of clarity is going to continue.

The bond market is pricing in one more hike in May and then 325-basis-point cuts over the remainder of the year, Roland said. The Fed, however, is suggesting that it is not going to cut rates until 2025, she added.

"The Fed is not going to tell you that they are making a mistake but that’s what it looks like to us," Roland said.

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Stuck In Late Cycle: Roland said the economy is navigating through a late-cycle environment, which is the trickiest part of the cycle. "The economic data are all over the place," she said.

The U.S. labor market continues to be the bright spot of the economy but it is beginning to show cracks, the analyst said. Challenger report showed a 300% year-over-year increase in layoffs in March, job openings were at the lowest level in over two years and jobless claims have begun to edge up, she noted.

"We do think that the lagged impact of fed tightening will impact the labor market which is really, really critical here," Roland said.

"The problem is the labor market is the last shoe to drop in the cycle."

When earnings come under pressure, companies act to protect the margins by doing layoffs and those layoffs translate to the unemployment data, which then goes up, the analyst said.

Then the Fed can cut rates, kickstarting a new cycle, she said.

 "We’re just not there yet. We are stuck treading water in the never-ending late cycle," Roland said.

The iShares 1-3 Year Treasury Bond ETF SHY ended Tuesday’s session down 0.01% at $82.05, according to Benzinga Pro data.

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