Financial markets go down the rabbit hole

JUST when you might have thought that financial markets could not turn any funkier – they have. On Tuesday (Mar 7), Jerome Powell, US Federal Reserve chair, indicated that the Fed may raise rates further than expected in order to combat inflation.

Two-year Treasury yields duly jumped above 5 per cent for the first time since 2007. But 10-year yields barely moved. This pushed the yield curve deeper into an Alice-in-Wonderland state known as “inversion”, in which it costs more to borrow money short term than long term.

By Wednesday, the gap had expanded to a negative 107 basis points – an extreme pattern only seen once before, in 1980, when then Fed chair Paul Volcker was unleashing shock therapy.