Stock market today: S&P 500 hits fresh record close on stronger economic growth
Investing.com -- The bond market may be signaling a “run hot” U.S. economy, according to the Sevens Report, which pointed to the sharp move in the “Notes over Bonds” (NOB) spread this year.
The firm explained that the spread, which measures the yield difference between 30-year and 10-year Treasurys, has climbed from 19 basis points in January to more than 63 basis points this month, the highest since August 2021, when inflation was running above 5%.
“Point being, the NOB spread has risen to a level last seen when inflation was surging and that should get people’s attention,” Sevens wrote.
The report highlighted two main drivers. First, political pressure on the Federal Reserve to cut rates.
“If the Fed is perceived as caving to pressure from the administration and lowering rates prematurely to placate the White House, it risks inflation becoming more entrenched in the economy,” Sevens said.
Second, tariffs could prove more persistent than assumed, according to Sevens. “Other businesses not directly impacted by tariffs may use tariffs as an excuse to raise prices,” it added.
Practically, a higher NOB spread suggests two possible outcomes. One is a “run hot” economy marked by solid growth and elevated inflation.
“In this environment, the playbook for Trumponomics euphoria should outperform,” Sevens noted, citing small caps, cyclical sectors, and equal-weight indexes as likely beneficiaries.
The other scenario is less favorable. If the spread keeps widening, it may signal “an upside inflation surprise, which could result in dramatically reduced rate-cut expectations.” That, the report warned, would threaten the equity rally supported by Fed easing bets.
“As the data is now, the message from the NOB spread implies more of a ‘run hot’ economy, at least for the next several months,” Sevens concluded.