The Great Inversion

By Matthew Gutierrez and Shawn O'Malley · January 19, 2024

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What would you do with $27 million? ??

Well, one 31-year-old heiress is giving away all of it, and she’s asking citizens how best to redistribute the wealth.

She says, “I have inherited a fortune…without having done anything for it.”

?? In other news, we’re popping champagne from 2021 this weekend — the S&P 500 just hit a new all-time high for the first time in over two years.

While market indexes have largely gone sideways since then, at least we (mostly) left NFTs in the past.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Traders bet on a normalizing yield curve
• How billionaires tried and failed to save the news industry
• The real reason you’re paying for so many subscriptions

All this, and more, in just 5 minutes to read.

POP QUIZ

What region of the world purchases the most luxury goods? (The answer is at the bottom of this newsletter!)

Chart of the Day

In The News

?? Yield Curve Nears Normalization

Tom Cruise may have been inverted in Top Gun, but the Treasury yield curve probably won’t be for much longer.

Bond traders are increasingly expecting the Treasury yield curve — a depiction of interest rates on government bonds maturing at different points in the future, from three months to 30 years — to “normalize.”

• A normal yield curve chart should slope upwards, with interest rates increasing from left to right, reflecting a premium for borrowing money for longer (aka the “time cost of money” in Finance 101 classes.)

Quick recap: The yield curve has been “inverted” for a long time now; Wall Street lingo for saying that bonds maturing sooner have higher yields than bonds coming due later.

• Specifically, last July, two-year Treasuries offered an entire percentage point more yield than 10-year Treasuries, meaning it was cheaper for the government to borrow money for a decade than for two years.
• That was one of the deepest inversions since the 1980s.

Typically, inversions are seen as a recession indicator. When the yield curve first inverted in October 2022, many thought the Fed would raise short-term interest rates too much and cause a recession, forcing them to cut interest rates down the road (extremely simplified, but higher rates now + lower expected rates in the future = inversion.)

• With the Fed expected to drop short-term interest rates this year, bond market veterans like Bill Gross and Harley Bassman are calling for the yield curve to un-invert.

Why it matters:

Where you land on the yield curve inversion debate reflects your outlook on inflation, economic growth, and the Fed’s response to both.

Rate cuts this year in response to a weaker economy and tepid inflation should normalize the yield curve. A strong economy, though, especially if inflation reemerges, could push the Fed to keep rates “higher for longer,” which would presumably keep the curve inverted.

But there are a wide range of possible outcomes. Important factors are the timing of rate cuts and by how much.

• Despite some progress in normalization, two-year yields still roughly match those on 30-year bonds (4.4%). Meanwhile, 3-month Treasuries offer almost 5.4%.

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