It was quite the spectacular rout in the bond market yesterday following the US CPI data release, as traders rushed to price in a 50 bps rate hike move by the Fed for March. Yields shot up dramatically and that is leaving for a couple of things to think about going into the weekend. Let's take a look.
10-year Treasury yields above 2%?
The close today will be one to watch in that regard. 10-year yields are at the highest since July 2019 and it has been quite the run since the turn of the year. I'm sure most of us had the idea that yields would hit 2% at some point but this early in the year and this quickly? Well, that is certainly something.
As long as yields keep above 1.97% and 2.00% at the close, that sets up for the potential for yields to establish the next leg higher in the weeks ahead. The big question will now come down to what is the terminal rate for the Fed in this tightening cycle.
A 50 bps rate hike is all but fully priced in but one can still expect rates traders to get a bit carried away in their imagination on how aggressive the Fed might be. The chart itself is a good enough excuse to act on that.
The yield curve continues to flatten
I think this is something that should warrant more attention more than anything else. The 2s10s spread is down to ~40 bps now and looks to be rather quickly narrowing, especially in the wake of the large and dramatic moves in the bond market in the opening few weeks this year.
The market is basically saying that there is some sort of policy mistake somewhere, either the Fed moving too slowly or rate hikes are going to cripple the economy via stagflation risks.
Just looking at today, 2-year yields are up another 4 bps today to 1.600% while 10-year yields are down slightly by 2.2 bps to 2.007%. It's looking ever so likely that the "crazy inverted yield curve" is coming and fast.
As such, recession risks will be something that are going to gather more attention in the months ahead. Just be wary of that when trying to gauge market and risk sentiment as a whole.
