The 2-year Treasury yield is 'acting like a meme stock' and swinging wildly as investors see the Fed making a mistake by not cutting interest rates, says John Hancock strategist

• The 2-year Treasury yield has been swinging sharply and "acting like a meme stock," a top strategist at John Hancock said on Tuesday.
• The inverted yield curve is telling the Fed it's making a mistake by not cutting interest rates, said strategist Emily Roland.

The 2-year Treasury yield has been whipped around in similar fashion to meme stocks because investors lack clarity on how the Federal Reserve will move on interest rates this year, a top strategist at John Hancock Investment Management said Tuesday.

"There's nothing like a deeply inverted yield curve to tell you that you're making a mistake and that's exactly what's happening here. The bond market is all over the place," Emily Roland, co-chief investment strategist at John Hancock Investment Management, told Bloomberg TV during an interview.

"When the two-year Treasury yield is acting like a meme stock there's a lot of uncertainty here around Fed policy," she added.

Big price swings in short periods are usually associated with so-called meme stocks including GameStop and AMC that have found favor with retail investors. But the 2-year yield — moving around 4% on Tuesday — has been on a roller coaster since early March. That yield is sensitive to expectations around Fed monetary policy.

Just last week, it slid to 3.6%, then pushed above 4% after a mix of weaker-than-expected economic data was rounded off Friday by the March jobs report showing some cooling in still-strong labor market.

The noise in the market stems from inconsistent messages from economic data in a late-cycle environment, the "trickiest" part of the cycle, Roland said. The 2-year yield at 4% was higher than the 10-year yield at 3.43% on Tuesday, sustaining an inverted yield curve widely seen as signaling an oncoming recession.

Roland said the bond market is pricing in a May rate hike of 25 basis points, followed by three rate cuts totaling 75 basis points in 2023.

"The Fed says they're not going to cut until 2025. The Fed is not going to tell you that they're making a mistake, but that's what it looks like to us," she said.

The yield climbed past 5% in early March for the first time since 2007 after Federal Reserve Chairman Jerome Powell suggested policymakers may upsize its March rate hike to 50 basis points to combat stubbornly high inflation.

The yield moved lower after Powell backed off that stance. Soon after, Silicon Valley Bank and Signature Bank failed, driving the yield to as low as 3.55% in late March as investors expected the Fed to cut rates in response to the banking crisis that erupted around regional lenders including First Republic Bank.

Jobs will be the 'last shoe to drop'

The "Teflon" labor market is a bright spot in the US economy, but cracks are showing, Roland said. Layoffs in March, as tracked by the Challenger report, were up 300% year over year, and initial claims for jobless benefits are edging higher.

The lag impact of Fed tightening will eventually hit the labor market, which is "the last shoe to drop in a cycle," she said.

Markets are watching for corporate earnings to come under pressure and prompt companies to lay off workers to protect their margins. "And then we need to see those layoffs translate into the unemployment data. That goes up, and then the Fed can cut and we can start the new cycle," she said.

Until then, "we are stuck treading water in the never-ending late-cycle period right now. It's a really tough one and a confusing one for investors," the strategist said.