2023 Rhymes with 2007

Sixteen years ago, in the second quarter of 2007, after the Federal Reserve had raised rates 4.25% and the first acute stress in subprime mortgages had been seen; U.S. Treasury yields and stocks bucked these early hints of what would become the Great Financial Crisis and rose dramatically (see charts, next page.)

HSBC’s “canary in the coal mine” subprime write-offs (2/7/2007) and New Century Financial’s bankruptcy (4/2/2007) had already happened, but because of residual strength in ISM surveys, labor, and consumer spending; markets and the Federal Reserve ran with the idea that the subprime problem was “contained.”

As we know now, it wasn’t. When two subprime Bear Stearns hedge funds collapsed in late June, interest rates began to fall, economic data began missing expectations in August, the Federal Reserve began cutting rates in September, stocks peaked in October, and the Great Recession began in December. By the end of the year, the 2-year U.S. Treasury had fallen to 3.05% from a 5.08% peak, the S&P 500 was down 9.8% from its high, and high-yield corporate bond spreads over U.S. Treasuries rose from 2.3% to 5.7%. In the second half of 2007, the mid-year hopeful narrative was supplanted by the whole economy crumbling.