The U.S. Treasury market was already crazy. We have had a mostly inverted yield curve for all of 2023. This tells us that a recession is coming.

The fact that the Fed has been mostly tightening is more confirmation that a recession is ahead. The Fed has been slowly draining its balance sheet, although there was a brief reversal of that with the Silicon Valley Bank bankruptcy. The Fed has continued to raise its target federal funds rate, and may even do it one more time, in spite of the inverted yield curve.

If it wasn’t crazy enough, now the short-term yields are all out of whack. Last week, the one-month yield on Treasury bills fell hard while the three-month yield did not.

The one-month yield fell over 100 basis points in a timespan of less than 2 weeks. The three-month yield stayed around the same or actually rose slightly.

The week ending on 04/21/2023 showed a mostly inverted yield curve from 3 months out to 30 years out. Again, this yells recession ahead.

The curious thing is that on 04/21/2023, there was a spread of 178 basis points to close the day. The one-month stood at 3.36%, while the three-month stood at 5.14%. This is a crazy spread.

A Debt Default Coming?

There is some speculation out there on why this is happening. Of course, most people don’t notice it or don’t care to talk about it, including those who actually cover the financial markets.

Mish Shedlock has speculated that people and businesses are buying up one-month Treasury bills (which forces down yields) because they are worried about a debt default coming. There is, after all, more talk about the prospects of the Republicans in Congress playing tough on raising the debt ceiling for the government.

While I can’t discount this as a factor, it is hard to believe that players in the financial markets are actually worried about a debt default by the U.S. government. Even crazier, by staying away from three-month Treasury bills in favor of one-month bills, that is saying that the U.S. government will have some form of default on its obligations within the next three months.

I have little doubt that the Republicans in Congress will allow the debt ceiling to be raised. Sure, there will be much political theater, and maybe there will be some concessions to have the appearance of some fiscal sanity, but I highly doubt either party will allow for an outright default at this stage of the game.

Maybe some investors are just wrongly worried about such a scenario. If that’s the case, then it makes a good case for buying three-month Treasury bills at this point. You can get yourself a nominal annualized return above 5%.

The Inversion is Still the Real Deal

I can only speculate on why there is a big spread between short-term yields at this point. My guess is that it will correct itself soon enough.

The bigger point is to not take your eye off the ball. That is the highly inverted yield curve and the fact that the Fed is still mostly in tightening mode.

The recession coming is likely to be one for the ages. The Everything Bubble is likely to implode. The air is already slowly coming out of the housing bubble. That should speed up rapidly.

The stock market, which is far more liquid and responsive, is likely to be a wild ride. And the ride is going to be more down than up in the next year.

A lot will depend on how the Fed reacts when things get bad. They’ve already shown that they are willing to bail out banks. But I don’t think they will bail out stock investors just for the sake of that alone. This is especially true when consumer price inflation is still running at 5%.

My thoughts for now are that you should be largely out of the stock market except for the permanent portfolio portion and heavy speculations.

If you have some liquid funds that you don’t need right now, you can take advantage of the yield spread and invest in three-month Treasury bills – currently the highest yield on the curve. It won’t beat inflation after taxes, but it is a way to lose less.