Another Day, Another Multiyear High in 2-Year Rates

Curve flattens as market digests Powell’s “hawkish pivot.” Treasurys and swaps endured another volatile session as markets continued to process yesterday’s FOMC press conference. An imminent rate hike, and the threat of several more pushed the front end of the curve to yet another multiyear high at 1.19% while longer-term rates declined. Fed Funds futures now imply 4.75 rate hikes through the end of 2022.

Spread between 2-year and 10-year rates hits 15-month low. With all the attention on the steepness of the front end of the curve, the long end has quietly been rangebound, in turn pulling the spread between 2-year and 10-year rates to its lowest level in 15 months at 0.61%. The spread is an oft-cited predictor of recession, and an inversion between the two rates has a perfect record of predicting economic contraction (most recently in 2019).

Day ahead. All of the attention tomorrow will be on inflation data. Personal Income and Spending data will be released, as will the University of Michigan’s Consumer Sentiment and Inflation Expectations surveys.