Beginning The Next Phase Of The 2022 Bear Market

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• Following the summer rally, risk assets once again overprice soft-landing prospects requiring a cautious stance on the part of investors going into year-end. Comments from Fed Chair Powell suggest that economic risks are increasingly skewed towards recession especially in Europe and the US in the months ahead.
• Though the inverted Treasury yield curve already anticipates a 2023 recession, ongoing Fed rate hikes suggest that US 2-year yields may rise to 4%. Even with the 10-year yields trading below 2-year yields during recessionary periods of the Great Inflation, it suggests that at 3.3% currently, the risk to 10-year yields is skewed higher in the months ahead towards 3.5-4.0%
• The summer rally in credit markets has unpriced the recessionary spreads seen in June, 2022. The prolonged Fed tightening cycle seems to indicate that investors will begin to see credit quality deterioration accelerate in the months ahead, as has been the case at this stage of the tightening cycle since the early-1980s.